The RBA will be meeting for a second time since it cut the rates last time. And this event could lead to some volatility in the markets!
The economy in Australia continues to be unsatisfactory. And the bank has repeatedly made it clear they are willing to take more action. The question now is, what will they do, and how will the markets respond?
The timing of this meeting is a little awkward for the RBA. It comes at the start of a data-laden week which might help give some insight into the economy both for policymakers and for analysts. In addition, the central bank is finally getting data that has the full effect of the back-to-back rate cuts and can see if more stimulus is needed.
What We’re Expecting
There is a really broad consensus that nothing will come out of this meeting. This is true even among those advocating for a rate cut now. Not only do they think the RBA will leave the rate at its record low of 1.0%, but also that the policy statement will closely mimic what we got last time. After all, there are only so many ways to say that rates will be kept low for an extended period of time.
Potential market moves are likely to be based on the interpretation of guidance, and what can be parsed about the likelihood of the next rate cut. Just last Friday, Governor Lowe was repeating his now common formula that he sees further weakness in the near term, and will take actions to correct it.
The Changing Trajectory
Where analysts pricked up their ears was a last-minute addition to his set speech. During it, he warned about rising asset prices being a “problem” in the future. This goes in line with a change in the perspective of some RBA-trackers who had previously warned that drastic rate cuts would lead to an asset bubble. They had also warned that the bank wouldn’t be as aggressive in its cuts as some are speculating.
The market tends to get ahead of itself, and the expectation of rate cuts will make stocks and other risk-driven assets more attractive. It would also be expected to push down the AUD. But, the two consecutive cuts signaled trouble in the markets and undermined consumer confidence. The, until now, conservative RBA might not be as eager to cut rates as the market expects.
Floating Away on a Sea of Cheap Money
The asset bubble in particular that Lowe seemed to be referring to is housing. With the lower rate, house prices are back on the rise. The housing auction clearance rate (a measure of interest to acquire homes) has spiked up to levels not seen since mid-2017. That was after the last time the RBA cut rates.
So far, the data that has been coming out of Australia since the rate cuts has been mixed. More jobs were created, but the unemployment rate has gone up. Construction has declined, but new home sales have finally turned positive. Wages have improved slightly, but domestic-facing services PMI slipped into contraction.
How the RBA will interpret this mixed bag of data ahead of the major data releases next week is an unknown factor. As far as the consensus of analysts, the projection is for a rate cut in October, or November at the latest. This would be followed by a further rate cut in February, in the middle of the summer.