At 14:30 pm on May 7, the Reserve Bank of Australia announced its interest rate decision as scheduled, announcing that it would maintain the interest rate at the current level of 4.35% without any adjustment.
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This seemingly unremarkable resolution not only debunked the previous sensational rumor that "Australia is about to raise interest rates three times this year", but also released many subtle signals to the Australian capital market before the announcement of the budget for the new fiscal year.
Today, let's take a quick look at the impact of this interest rate decision on the Australian capital market in the short and medium term, and then make a reasonable outlook on the upcoming federal budget from the perspective of monetary policy.
First, let's look at the interest rate decision.
The interest rate decision announced yesterday afternoon seems ordinary, but judging from the perspective of the financial market, there are actually many capital forces in the market that expect the RBA to raise interest rates.
Even the Reserve Bank of Australia (RBA) publicly stated in its statement after the meeting: "Financial markets are accurate predictors of our interest rate decision." ”
From a currency market perspective, the Australian dollar began to rise quietly against major currencies, especially against the US dollar, 48 hours before the decision landed.
If you want to go further, it is that after the release of the Non-farm Payroll data from the US Bureau of Labor Statistics last Friday, the AUDUSD suddenly rose from 0.6573 (the US dollar weakened due to the rising unemployment rate) to the 0.6645 resistance level, a total of 727 points.
If we continue to work backwards to the time of the Australian Q1 inflation data (which exceeded expectations), then the Australian dollar's rise will become even more significant - from 0.64658 to 0.66457, an increase of almost 3% in four trading days.
This is enough to illustrate the problem: the funds in the foreign exchange market that predict that the RBA will raise interest rates are quite considerable, and the actual entry has made the Australian dollar higher.
This phenomenon is also visible to the naked eye in the equity futures market: the Australian stock index futures index triggered from around 7,520 points last week, breaking a downward trend that lasted for nearly two months, and recorded a gain of nearly 300 points in just a few trading days.
The higher futures index indicates that the bullish stock market is strong. However, for equities to move higher, they must be premised on the tailwinds of maintaining or lowering interest rates, rather than being driven by the expectation of higher rate hikes.
This creates a contradiction: the foreign exchange market believes that the RBA has a certain probability of raising interest rates, while the equity market believes that the probability of a rate hike by the RBA is extremely small.
In other words, capital markets are divided on their outlook for future interest rates. And these price actions perfectly reflect the current market conditions and the capital market's expectations for the RBA's monetary policy.
To put it simply, it's chaos.
So why is there confusion, especially why did the two major assets, which have been highly negatively correlated for a long time, appear to be highly positively correlated before the decision landed yesterday afternoon (in the green box in the chart).
The answer to this question lies in the subtle shift in the RBA's rhetoric, which has led to divergence and confusion in capital market pricing.
In its speech yesterday afternoon, the RBA said: "The level of interest rates needed to determine whether inflation can return to the target range in a timely manner needs to be constantly evaluated [by the central bank], and it is difficult to know how to adjust policy (rate hike or cut) next." ”
If we compare the RBA decision statement in February, we see a significant difference: "We cannot rule out another rate hike. ”
Obviously, the statement of the February decision was highly hawkish, hinting at a rate hike, while yesterday's decision was neutral and did not hint at a rate hike or cut.
If we compare the statements made after the release of the Q1 inflation data, we will find that yesterday's statement was more aggressive, because the RBA's statement at that time only believed that "inflation will come down slowly." ”
In this way, we can clearly deduce the RBA's position, which is that the current economic environment does not support a rate cut for the time being, but it is definitely not to the point of talking about a rate hike.
Overall, it is relatively stable.
There is another set of key data: the RBA expects inflation to return to the target range (2~3%) in the second half of 2025 and the midpoint (2.5%) in 2026, and raised the year-end inflation level to 3.8% from the previous forecast of 3.2%.
So what are the implications and implications of the RBA's stance and the timing of inflation coming down on the upcoming Budget?
The answer is also very clear, that is, there will be no drastic policies to stimulate the economy in the budget, but it will be a test of how the ruling party can alleviate the pressure on residents' lives (increase various subsidies and social security) without accelerating the rebound of inflation due to excessive fiscal support policies.
In this regard, the Commonwealth Bank's global economic and market research department reported that the Australian federal government will record a fiscal surplus of 15 billion Australian dollars this year, and it will be the first surplus in 15 years last year.
Clearly, the federal government has been very cautious in spending, so that it has been able to create fiscal surpluses for two consecutive years while the rest of the world's advanced economies are widening their fiscal deficits.
So how will the federal government ease the cost of living? There will be three main aspects:
First, the adoption of tax relief policies that have been legislated.
From 1 July this year, the tax rate will be reduced from 19% to 16% for residents with an income between 18,201~45,000 Australian dollars, and from 32.5% to 30% for residents with an income between 45,001~120,000
In addition, the thresholds for the two top brackets of 37% and 45% personal income tax rates will be raised from $120,001 and $180,000 to $135,001 and $190,000 respectively.
Second, to increase productivity in Australia by encouraging new ventures and innovation.
According to the report of the Australian Parliament, the Australian government will continue to provide optimal allocation and investment of resources in areas such as new ventures and innovation in terms of laws and policies, so as to promote the optimization of hardware and human resources, and ultimately achieve productivity improvement.
Although these words seem general, we might as well combine the "Future of Made in Australia" plan revealed by Australian Treasurer Chalmers in advance last week, and we can see that the federal government will focus on the implementation of foreign investment.
Third, reduce the cost of higher education and continue to alleviate cost-of-living pressures through various measures.
Of course, the details will be based on the official version of the budget next Tuesday (May 14), but with inflation and monetary policy (interest rate) as the general direction, we can reasonably adjust our expectations in advance.
Returning to our topic at the beginning, the RBA's next interest rate policy direction, the market's expectation is still inclined to cut interest rates, but it is difficult to reach an agreement on the timing of interest rate cuts.
The Federal Bank is expected to start a rate-cutting cycle in November, while data from Bloomberg and Reuters suggest that February 2025 is also likely to be a historic turning point in this post-pandemic era.