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Free AccessREPEAT: MNI: RBA Forecasts Little-Changed But Risk to Upside
Repeats Story Initially Transmitted at 02:19 GMT May 4/22:19 EST May 3
By Sophia Rodrigues
SYDNEY (MNI) - The Reserve Bank of Australia didn't make any significant
changes to its forecasts but the overall balance of risks, and the forward
guidance suggests market may be underpricing risk of an earlier hike.
Currently money market is pricing in around 50% chance of a 25bps hike in
the cash rate by February next year and about 92% chance by May.
Governor Philip Lowe has been giving forward guidance in his recent
speeches and last month the RBA included it in the minutes of the April board
meeting but later omitted in the May cash rate statement.
In the quarterly Statement on Monetary Policy published Friday, the RBA
incorporated the forward guidance but the language appears to be slightly
stronger than the ones used in recent months in the speeches and minutes.
The RBA said it expects further progress on both inflation and unemployment
and for some time its view has been the a steady cash rate at 1.5% would assist
that progress by promoting stability and confidence.
It then added that "If the economy continues to perform as expected, higher
interest rates are, however, likely to be appropriate at some point." At the
same time, it reiterated that it does not see a strong case for a near-term
adjustment in the cash rate.
The inclusion of "at some point" in forward guidance suggests the RBA wants
to leave open the timing on the hike depending on how the balance of risks pan
out.
The main factor that would determine the timing is the possibility of banks
passing on higher funding costs by raising lending rates, and the risk of their
funding costs escalating further if global inflation rises more than expected.
In the event of this, the cash rate is likely to remain on hold for longer.
On the other hand, if "broad-based" spare capacity in the economy reduces
earlier than expected and wage costs accelerate faster, then a rate hike would
happen sooner. Also important to the inflation outlook is how the risk from
retail deflation pans out versus the RBA's expectation. There is an additional
risk from rise in dwelling construction costs because of the competition it
faces from non-residential construction.
An important upside risk is from the upcoming federal budget due on May 8
because it is clearly going to be expansionary and the RBA's forecasts could
change in the next quarterly policy statement in August when those details are
incorporated.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.