Monday, October 6, 2014

RBA cash rate on hold tomorrow - but tea leave readers will scrutinise statement for subtle changes

To most outsiders, it all sounds a bit ho mum.

But tomorrow's meeting of the Reserve Bank board is shaping up as anything but a dull affair.

While almost every market economist thinks the RBA will leave rates steady, all eyes will be on any changed language that could signal the start of a softening up period for a rate rise next year.

The anticipation for even subtle changes or the removal of key phrases is against the background of 2.5 percent cash rate for the past 13 months - one of the longest period of rates stability since 1990.

In statements throughout the year, RBA governor Glenn Stevens has been at pains to signal that the cash rate would remain low for an extended period and that any change in policy would be flagged well ahead.

In his September rates statement, Mr Stevens once again said "the most prudent course" was "likely to be a period of stability in interest rates".

Source: Reserve Bank of Australia September rates statement
Tea leave readers who scrutinise the RBA musings, including economist Annette Beacher of TD Securities, think the RBA is on the brink of preparing the market for an eventual cash rate increase.

"While we're not there yet, I think the time is coming where 'period of stability' of interest rates will be dropped from the statement," Ms Beacher said.

"I think from hereon in with all the discussion of the hot housing sector, we're wondering how long this period of stability will be in the statement."

The RBA has also noted that commodity prices " in historical terms remain high" but this is also likely to change with the iron ore price down dramatically from mining boom highs at US$79.60 a tonne  

"So tomorrow we expect to see 'historically high levels' and 'period of stability'. Technically that is a cut and paste from recent months but the risk is that one of those statements is not there," Ms Beacher said.

"So that makes tomorrow's RBA board meeting a must see event."

Source: Reserve Bank of Australia September rates statement

 Economists will also be watching for commentary on the slowdown in China's economy, the outlook for earlier than expected rate rises from the US Federal Reserve and a landscape of geopolitical flashpoints in Syria, Iraq, Ukraine and Hong Kong.

The steady decline of the Australian dollar - forced in part by rate cuts of 2.25 percentage points since November 2011 - could also feature tomorrow.

This morning it was buying 86.63 US cents after hitting a year high of 95.04 in July.

In September, Glenn Stevens said the dollar "remains above most estimates of its fundamental value".

While the RBA will take comfort from the recent falls in the currency, economists are expecting the RBA to maintain its jawboning to force the Australian dollar even lower.

The ramped up interest in the RBA's statement tomorrow comes amid positive private data out today on inflation and employment.

The monthly inflation gauge from TD Securities and the Melbourne Institute shows inflation rose just 0.1 percent in September after two months of flat results, making 2.2 percent over the year.

The survey  says underlying inflation probably rose 0.5 percent in the September quarter and 2.6 percent over the year - at the midpoint of the RBA's comfort zone of 2 to 3 percent.

The closely watched ANZ Job Advertisements series shows job ads in newspapers and on the Internet rose almost one percent in September - the fourth consecutive monthly rise.

ANZ believes this indicates that the labour market is gradually improving and that he official jobless rate will stabilise at just above 6 percent for the next few quarters before decreasing.