RBA to keep the cash rate on hold at 1.5% - TDS

TD and consensus expect the RBA to keep the cash rate on hold at 1.5% at tomorrow’s meeting and analysts at TDS expect few if any changes to the statement even though market speculation is building that the policy assessment tone could turn hawkish.

Key Quotes

“This follows the chorus of hawkish notes sung by its Central Bank brethren in recent days. We anticipate a neutral-toned statement.”

“The RBA has long held an upbeat view on the global economic outlook. While the Bank is likely to reaffirm this and point to the run of Aussie employment data as supportive for the growth outlook, the RBA is likely to fall short of striking similar hawkish tones as the BoC, BoE and ECB given elevated levels of spare capacity, sub trend growth (even if temporary) and prospects that a firmer AUD could disrupt the economic transition.”

“Nonetheless the shifting in RBA pricing has been swift. The day before the June RBA meeting, the market was placing a 20% chance of a Nov’17 RBA cut. This morning the market is placing a 5% chance to a 25bps Nov’17 hike! However rate hike expectations have shifted a lot more aggressively for 2018. At the start of last week, the market was placing a 3.5% chance to a 25bps RBA cut at its Feb’18 meeting. Today the market is pricing in just under a 25% probability of a Feb’18 hike.”

“Quite clearly offshore central banks have played a part in RBA repricing. Indeed we expect global central banks to reaffirm their hawkish monetary policy stance over coming months, even if inflation is low as upside risks to global growth and loose financial conditions are likely to be interpreted as allowing for tighter policy.”

“Inflation and employment will be key locally. Earlier today TD firmed its Q2 CPI forecasts at 1.82%/yr. While inflation is not accelerating, it is well past the lows and consistent with the RBA’s Q2 2% forecast. However it is the forward looking indicators on the labour market that point to an ongoing firming in jobs over coming months. We believe both offshore and domestic factors argue for a further steepening in the RBA OIS curve over coming months. We will not initiate a new trade ahead of this tomorrow’s meeting.”