Fundamental Fun with Orbex – RBA Monetary Policy Statement

On Thursday, November 8th at 19:30 EST, or Friday, November 9th at 01:30 CET, the Reserve Bank of Australia will release its Monetary Policy Statement (sometimes abbreviated as SoMP or MPS).

The statement is a key bit of insight into what the RBA is thinking about the economy. If there is a major change in their stance, it could have an impact on the market.

The statement by the Bank covers a review of expectations of economic and financial conditions, as well as their opinion on what the proper monetary policy stance should be. It’s a quarterly released data guide to what the RBA will be doing with their interest rate policy.

As a reminder, we recently had an RBA meeting on November 5th where they stood still on all policy.

Arguably most of the outlook of the RBA has been priced into the market, with the broad consensus that the bank will remain pat on any policy far into 2019.

As such, what analysts will be looking at are changes in the wording, and with economic conditions remaining largely in line with where they were for the last statement on August 8th, a significant shift in outlook from the policy would be a major surprise.

What’s been going on

We should remember that the RBA is notoriously cautious and conservative when it comes to interventions. As recently as their last meeting, just a couple of days ago, they were quite adamant about not seeing any urgency to change the cash rate.

The bank is content with what they see the currency trading within its two-year range, and believe their current low rates are consistent with reaching their long-term CPI objectives. Since then, CPI data has remained largely in line.

The RBA is in what’s considered an easing cycle, even though their last action was a small raise. Last month’s meeting resulted in the 24th consecutive pause in that easing cycle – indicating that the market is pricing in continued long-term relatively low-interest rates. What could change that? Well…

What analysts will be looking at

As mentioned previously, should something from the Monetary Policy Statement move the market, it will be an unexpected change in the outlook given in the last policy statement.

That is divided into two sections.

Inflation

The Statement covers near-term inflation expectations and had previously projected 1.75% inflation for December. That likely will be phased out of this statement. The last statement projected:

– End 2019 inflation: 2%

– End 2020 inflation: 2.25%

Should the bank maintain or cut inflation expectations, that would be consistent with the market’s outlook that there will be no change in monetary policy in the medium-term. A revision to the upside might be a bit upsetting for markets.

Economy

The second section deals with the RBA’s expectations for the economy; the central bank has no mandate to support the economy, but it does matter indirectly because higher economic growth can translate into higher inflation. The last statement projected:

– End 2019 GDP growth of 3.25%

– Mid 2020 GDP growth of 3.0%

Additionally, there was a projected year-end unemployment of 5.5%, so we’ll likely see unemployment projections for the next quarter.

While the consensus is that the bank will maintain or reduce their expectations for inflation, that should mean the market will be quite sanguine in response to the data release. But keep an eye out in case there is a revision of higher inflation.