The RBA are widely expected to stand pat at its meeting on Tuesday with ASX 30-Day Interbank Cash Rate Futures indicating an 89% expectation for the Cash Rate Target to kept at the record low 0.75%, and its associated implied yield curve pointing to the likelihood of a cut at the following meeting in February.
The rhetoric from the central bank has supported the consensus view that the RBA is open to future action but will likely bide it’s time for now as the recent Quarterly Statement on Monetary Policy noted the board is prepared to ease policy further if required and that pausing last month allowed time to assess effects of past easing and global events. Furthermore, the board was said to be mindful rates are very low and that further cuts bring other policy options closer, while it was aware more easing could convey an overly negative view of the economy and suggested the Australian economy is gradually coming out of a soft patch with global financial markets also appearing to have passed a trough of pessimism.
RBA Deputy Governor Debelle also advocated a wait-and-see preference citing a lag in the effects of monetary policy and that not much time has passed yet with more time needed for policy to work. Conversely, RBA Governor Lowe has not provided much in terms of fresh clues but has pushed back on the notion of QE which he stated was not on the agenda and that they would only need QE if the Cash Rate falls to 0.25%, while he reiterated negative rates are extremely unlikely and is said to be less convinced regarding the effectiveness of other unconventional measures with the jury still out.
Despite this distancing by Governor Lowe on QE, there are some that are not convinced, with several large foreign and domestic banks such as JPMorgan and Westpac anticipating QE may be launched as early as H2 next year to help the RBA achieve its objectives, while the recent slew of weak data also supports the case for more easing. These soft releases include a surprise contraction in Australian Employment for October at -19.0k vs. Exp. 15.0k (Prev. 14.7k) and rise in the Unemployment Rate to 5.3% vs. Exp. 5.3% (Prev. 5.2%) to widen the gap against the central bank’s 4.5% target. Australian PMI data also slipped into contraction territory across the board for November, while Q3 Construction Work Done continued to decline albeit at a slower than expected pace of -0.4% vs. Exp. -1.0% and Capital Expenditure added to the disappointing releases at -0.2% vs. Exp. -0.1% (Prev. -0.5%).
These substandard economic releases alongside ongoing global slowdown concerns and US-China trade uncertainty, all support the case for why future policy measures cannot be fully taken off the table and that the central bank has to remain vigilant to risks despite having already cut rates on 3 occasions this year.
The announcement is scheduled for 0330GMT/2130CST/1130HKT and aside from the rate decision where a hold is seen as the foregone conclusion, focus will turn to the statement as any hints which support market pricing of a cut in February is likely to pressure AUD. On the other hand, the currency may find support on an unwinding of dovish bets should the RBA continue to suggest a turning point in the economy or lean back from QE.
Recent Comments and Calls
Citi no longer expects RBA to deploy QE next year citing recent comments from RBA Governor Lowe which suggested 0.25% is the effective lower bound for rates. JPMorgan maintained its forecast for RBA to lower rates in February 2020 but now also see the RBA to launch QE by end-2020. NAB recently pushed back its RBA rate cut forecast to February 2020 from a Prev. forecast of a cut at the upcoming announcement. RBC sees RBA cutting rates to 0.25% in 2021 and to begin QE that year also. Westpac forecasts RBA to lower rates to 0.25% by June 2020 and start QE in H2 2020.(RANsquawk)