In recent weeks, I have seen calls for the Reserve Bank of Australia (RBA) to cut interest rates.
It’s important to remember when the RBA moves to cut interest rates, there will probably be two (or more) 25bp moves.
As my mate Saul Eslake once noted, interest rate changes are like cockroaches, when you get one, there is always another just around the corner
— Stephen Koukoulas (@TheKouk) September 3, 2018
Part of the alarm no doubt came from some troubling economic data points…
Another round of horrid data: Retail sales 0.0%; manufacturing sales -1.6%; wholesale trade sales -1.9%; inventories up 0.6% (bodes poorly for future production); company profits good at 2.0% wage & salaries soft only up 4.5% reflecting employment – NOT underlying wages growth
— Stephen Koukoulas (@TheKouk) September 3, 2018
So I looked forward with great anticipation to tonight’s announcement on monetary policy from the RBA. Not only was there apparent economic tension, but technical tension existed across major Aussie currency pairs. Surprisingly, the RBA was definitively bullish in a statement that was not made at all to hint at imminent rate cuts. Instead, I can see a case for imminent rate hikes.
First of all, the RBA made zero mention of global trade wars and characterized China’s growth as only slowing “a little.” Traders have tended to sell the Australian dollar (FXA) on global and Chinese economic risks. Most importantly, the RBA made a bullish forward forecast on the economy along with an upbeat forecast on inflation:
“The Bank’s central forecast is for growth of the Australian economy to average a bit above 3 per cent in 2018 and 2019. In the first half of 2018, the economy is estimated to have grown at an above-trend rate…
Inflation is around 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower, at 1¾ per cent.”
