The official cash rate was again unchanged last week following the monthly RBA board meeting and has remained at 1.5% since August 2016. The decision to leave the cash rate unchanged was universally expected, as was the unchanged neutral policy guidance. The Governor’s accompanying statement only contained a couple of changes, the most significant around the economic growth forecast for 2018 being adjusted from “a bit above 3%” to ”faster than in 2017”.
Given last week’s December quarter GDP number was 0.4% for an annual GDP of 2.4%, the above statement can be interpreted as the RBA now feeling comfortable with growth being above 2.4%, which is a major qualification of the RBA’s previous growth outlook of “a bit above 3%”
Just over four weeks ago, traders were pricing in an RBA interest-rate hike - the first since 2010 - as a done deal for the fourth quarter of 2018. They’ve since backtracked to bet that the RBA will maintain a record-low 1.5% for at least the rest of the year.
Markets continue to expect the RBA to begin a gradual tightening cycle late this year, with the risk of the timing pushing into early 2019 given the lower growth forecast – with a 25 basis point hike not fully priced in till May 2019.