Daily Commentary BY THE CURVE TEAM –

RBA in Focus as Monetary Policy Divergence Continues

10th of August, 2018

The RBA’s quarterly Statement on Monetary Policy will be the focus today before a raft of key data will be released offshore. While the core message from the RBA is unlikely to change today, the theme of monetary policy divergence globally is continuing to evolve.

While we are unlikely to get any huge surprises in today’s quarterly statement from the RBA, the final make up of their forecasts along with the words they choose to accompany theme will be closely analysed.

Despite the RBA being set to remain on hold for the foreseeable future, the theme of monetary policy at the global level continues to evolve.

The choice of words used by the RBNZ yesterday following their decision to leave their cash rate on hold continued to hit their currency overnight. Lower expectations for the cash rate combined with a resurgent USD has seen the NZD multiyear low.

As the New Zealand central bank downgraded expectations, the renowned dove amongst the Fed members in the US appeared more hawkish overnight, which tells you a lot about what it happening in the US.

Chicago Fed President Charles Evans, who as recently a December last year dissented against lifting rates, has suggested rates might need to become “somewhat restrictive” as soon as 2020.

He said overnight that “I do think that the underlying inflation expectations that sort of underpin the current inflationary environment are a little bit lower than I would like to see,” but he added that “given the data — economy being strong — I think inflation expectations are going to catch up.” 

That is a big shift from a little over six months ago when he indicated inflation expectations were too low and could be preventing inflation from rising to the 2% target. At the time he also thought only 1 to 2 hikes this year was appropriate and the Fed is now set to hike up to four time in total in 2018.

The USD index is now at an important junction. Last night saw its highest close since July 2017 and a break higher could see it run a long way. This would not only have implications for the AUD and Australia’s monetary policy settings but could increase the pressure on emerging markets and others who have over indulged in USD debt over during the QE driven days of easy credit.

David Flanagan

Director - Interest Rate Markets