This week will light the path for monetary policy; Market Strategist Evan Lucas guides the way.
Last week was all about ‘framing', and this one is all about the framing's impact on a monetary policy level.
Being the first full week of the month, central bankers the world over will once again meet to map out how domestic policy will proceed for the next 30 days, as well as the 365 days ahead. However, being February, it is also the first meeting of the new calendar year for most central banks and the first time in eight weeks some of them have met.
The Bank of England (BoE) and The Reserve Bank of New Zealand (RBNZ) meet for the first time this year, while the European Central Bank (ECB) meets for a second time in two weeks to discuss the 2018 policy outlook.
From my perspective, this week is about the future settings of Australian monetary policy. With the RBA meeting for the first time in 2018 on Tuesday, the first time since December 5, there is plenty of material the RBA has to catch up on.
But the RBA meeting is not the only thing coming out of Martin Place this week. The other is the release of the new Statement of Monetary Policy (SoMP) on Friday – for us policy watchers, this adds another level of spice.
Clearly, there will be no movement in the cash rate on Tuesday, as last week's inflation read shackled the RBA to the fence.
Trimmed mean inflation – the RBA's preferred measure – is holding at 1.8 per cent, unchanged for the last four consecutive quarters. It also logged its ninth consecutive quarter outside of the targeted 2-3 per cent range. Therefore, with a Tuesday rate hike out, the question becomes, is the RBA ‘out' for the remainder of 2018? I would assume, yes.
Markets are certainly coming around to this idea. Both the interbank and the swaps markets saw their probability of a 25-basis point rate hike falling between 4-8 per cent respectively following the release of the fourth quarter CPI read last Wednesday to time of writing.
The other market of interest is the World Interest Rate Probability index. That index is suggesting there's a 65.6 per cent chance the RBA will increase rates by December 2018, but it was as high as 80.5 per cent just seven days ago – markets are getting cold feet here.
Therefore, the SoMP should reflect what has happened over the past eight weeks. It is unlikely to undergo a huge revamp – the RBA is facing the persistent issue of low inflation and one could mount an argument that the board will need to defend its position of not cutting rates further to assist in moving the dial on inflation.
The opening few paragraphs of the SoMP are likely to outline the growth in the global and domestic economy, and the actuals seen in Australia's net exports as positive factors. They should also provide reasoning for holding rates at current levels. The SoMP is likely to then highlight the movements in Chinese growth and output, which I would argue, should provide economic tailwinds for Australia over time.
These points all make Friday's SoMP worth taking a good look at. It is currently not as ‘optimistically measured' as that of previous statements released by the RBA following their meetings.
The previous SoMP forecast highlighted that economic growth should begin to flow through in the first half of 2018, and will continue its upward trajectory for the proceeding 12 months. Employment should remain robust with unemployment holding at around 5.5 per cent, before falling to 5.25 per cent come the end of 2019.
However, as the SoMP has previously, and will once again, point out – inflation is weak and a core component of core inflation is wage growth. The lack of wage growth is a global phenomenon, and the disconnect between the economic spoils of growth and increases in pay packs has become a political issue as well as an economic one. It is becoming a hard issue to solve.
The RBA believes that wages will rise over the coming 24-month forecasted period, however, that forecast suggested that wages should have already begun this transition. However, on the latest actuals, the RBA's forecast is not being supported. This is a key area to watch in Friday's release.
In the end, the markets are the best gauge for Australia's 2018 monetary policy direction. One would suspect the interbank, swaps and interest rate markets should all move further away from hike probabilities by the end of the week.
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