What’s in a word?
A lot if it’s uttered by the Reserve Bank governor.
Each month financial market economists trawl through the governor’s statement following the central bank’s board meeting to see if there are any changes from the previous month to gauge the timing of an eventual move in interest rates.
You may wonder after 17 meetings of the cash rate staying at a record-low 1.5 per cent how many ways there are to say ‘unchanged’?
But even a subtle change in the wording could be a pointer to a rethink in interest rate policy, prompting banks, fund managers and financial institutions to alter their market positions and portfolios accordingly.
While this might all sound like paranoia, trillions of dollars are involved, potentially affecting people’s home loans, investments and their retirement nest eggs.
This week’s statement by governor Philip Lowe following Tuesday’s March board meeting did have such a change, over the economic growth outlook.
In his statements for the December and February board meetings – it doesn’t meet in January – Lowe talked about the bank’s central forecast being for growth to average three per cent over the next couple of years.
However, this week the forecast changed to the economy growing ‘faster in 2018 than it did in 2017’.
The reference to ‘three’ per cent was dropped.
The wording change proved to be significant, coming just 24 hours before the December quarter national accounts which showed annual growth ease back to 2.4 per cent from 2.7 per cent previously.
It was even weaker than the 2.5 per cent for 2017 predicted by the central bank only a month earlier.
JP Morgan economist Ben Jarman believes the growth result is a sign the Reserve Bank’s 3.25 per cent objective for this year is ‘looking ambitious’.
‘The governor’s language in the last couple of days reflects some back-pedalling from this,’ Jarman says.
He expects downward revisions when the Reserve Bank releases its next round of economic forecasts in May will underscore the fact Australia will lag the global interest rate normalisation process ‘by some distance’.
Speaking before the release of the national accounts at a conference on Thursday, Lowe, while insisting he doesn’t see the figures before they are released by the Australian Bureau of Statistics, conceded they might be slightly lower than first thought because of weak exports.
But he believes it didn’t change the outlook ‘at all’ with consumption and employment picking up and investment rising strongly.
And with the economy moving in the right direction, he was less subtle about the interest rate outlook.
The next move in interest rates will be ‘up, not down’ but the board is not anticipating an adjustment any time soon, he said.
The last time the cash rate went up was in 2010, meaning some borrowers have never seen an increase.
But Lowe is confident households will find higher interest rates ‘manageable’ because at that time wages will be picking up and unemployment will have fallen further.
‘When banks are making loans over the past year or so they have been required to assess the serviceability of that loan on a seven per cent interest rate – the average interest rate at the moment is 4.25,’ Lowe told the Australian Financial Review Business Summit.
‘If lenders have done their job there is a reasonably sized margin there.’
But don’t hold your breath worrying about a rate rise.
Financial markets see only a 50/50 chance of a rise in the cash rate to 1.75 per cent by the end of the year.