- The last few RBA meetings have not been market-moving events, the same is likely tomorrow
- Consensus does not expect a change, and neither do we
- AUD looks set for a short term bounce, but likely to move lower in the longer term
In recent times, the Reserve Bank of Australia has done a commendable job of lowering the market’s expectations for its monetary policy meetings. Despite excitement from other central banks such as Canada, the RBA has consistently brushed off speculation that a change of stance is warranted. Markets are only pricing in a rate hike in May 2018, and the consensus expects the RBA to hold rates at 1.5% tomorrow while maintaining its current monetary policy. In other words, expect the RBA to deliver another non-event.
No hurry to raise rates, with household debt a significant concern
Both RBA Board member Ian Harper and Governor Philip Lowe have downplayed recent global events. Specifically, Lowe has stated that rising interest rates in other countries have no “automatic implications” for Australia, meaning that rates will not have to rise in the “near term”. This being said, Lowe also mentioned that higher global rates would probably filter to Australia in the longer term. So when the next move on cash rates happen, it is more likely to be up.
Many members of the RBA have also raised concerns regarding household debt, suggesting that consumers will not be able to cope with much higher interest rates. In a recent statement in late September, RBA assistant governor Michele Bullock stated that "When interest rates do start to rise in Australia, they are likely to impact consumption in a different way than they did when we were in a low debt society, so this is something the Reserve Bank will need to take into account."
Our view and the currency
Our view matches the consensus, and we see little reason for the RBA to change its current policy of staying in neutral. A hawkish shift would require higher rates of growth and inflation, while a dovish move is unlikely given the governor's previous rhetoric.
Looking at the Australian dollar, we have recently changed our medium-term outlook from bullish to bearish. All the previous drivers of the currency: good economic data from China, dollar weakness and rising commodity prices are now working in reverse. After falling for several days, the picture in the daily chart for AUD/USD suggests that a short-term bounce is likely with the pair heading into oversold territory. However, in the longer term, the Aussie can fall much further as the Chinese economic upcycle that started in 2016 comes to an end. A recent history of the currency pair is illustrated below:
AUD/USD rolls over sharply thanks to China and a stronger USD