RBA Monetary Policy Preview – April 2015

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RBA Monetary Policy

With the long Easter holiday weekend concluding on Monday, the financial markets will wake up to a packed Tuesday, starting with the Reserve Bank of Australia’s monthly monetary policy. The RBA’s monetary policy is likely to bring a lot of volatility to the AUD crosses across the board, as the markets are yet again finely divided between a rate cut and the RBA standing pat on policy.

One of the facts being the dramatic weakening of the Australian dollar last week, albeit the currency fell for different reasons, speculators rushed in, adding to the selling pressure in expectations of a rate cut from the RBA. However, last month, the RBA left policy unchanged after cutting interest rates in February by 25bps.

With the markets pricing in a rate cut, there is a significant upside risk to the Australian Dollar should the RBA stand pat on policy. Cutting through the noise, here are some factors to bear in mind heading into Tuesday’s monetary policy meeting from the RBA.

RBA aware of market expectations on rate cuts

In the March meeting minutes, the RBA recognized that the financial markets were expecting a rate cut by May 2015 as per the statement below.

Members concluded their discussion with the observation that financial markets were expecting another reduction in the cash rate target by May, with around a 50 per cent probability of the reduction occurring at the present meeting

Risks in the Australian property and mortgage markets

The RBA monetary policy was aware of the risks in the Australian property and mortgage markets as a result of investor activity.

In Australia, risks in the household sector continued to be centered on housing and mortgage markets. The composition of these markets remained skewed to investor activity, especially in Sydney. Members noted that, at the margin, the recent decline in interest rates could boost the housing market, including prices.

A further rate cut of 25bps could potentially see more activity in the property and mortgage markets as a result of easy monetary policy.

In December 2014, APRA and ASIC launched an investigation to probe interest online and high loan to value ratio loans and also launch affordability test for new borrowers in an effort to clampdown on investor activity in the property and mortgage markets.

Inflation & Unemployment

In its March meeting minutes, the RBA noted that there was still some spare capacity in the economy and that labor market conditions would likely remain subdued and therefore wage pressures were contained. The RBA also expects the inflation to remain within the Central Bank’s target range over the year.

On balance, the evidence suggested that labor market conditions were likely to remain subdued and the economy would continue to operate with a degree of spare capacity for some time. As a result, wage pressures were expected to remain contained and inflation was forecast to remain consistent with the target over the next year or so, even with a lower exchange rate.”

RBA wants “some time”

Although the markets don’t quite go crazy about the language in the minutes, an interesting factor to point out from the March meeting minutes is that the RBA members see a benefit to allow “some time” for economy to adjust to the recent interest rate cut.

In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change. They also saw advantages in receiving more data to indicate whether or not the economy was on the previously forecast path.”

It could yet again boil down to probably a month (meaning an interest rate cut in April), or probably in May/June, if one has to consider the term “some time

Economic data from Australia after March 3rd Policy meeting

GDP q/q 0.5% (below estimates of 0.7%), up from 0.4% previously
Retail sales m/m 0.4% (met estimates), up from 0.2% previously
MI Inflation expectations 3.2%, down from 4% in FebruaryWage expectations declined to 1.8% from 2.2% (Dec, 2014)
Employment change 15.6k (above estimates of 15.3k), up from a revised 14.6k previously
Unemployment rate 6.3% (above estimates of 6.4%), down from 6.4% previously
HIA new Home sales m/m 1.1%, down from 1.8% previously


RBA April Policy – Conclusion

It would be a close call, but the one aspect that points to inaction by the RBA at this meeting, is the surge in the new home sales which high a cyclical high, which is indicative that the housing markets could potentially rally should the RBA continue with its interest rate cuts in April.

Also, despite the recent blip in the US labor market data, the Fed remains confident of a rate hike this year. Bearing this in mind, the RBA could actually slow down in its rate cuts, while waiting for more clues from the FOMC.

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