What’s ahead for interest rates?
While no one really knows, each month the Reserve Bank of Australia’s post-board meeting statements give an indication of what the RBA thinks lies ahead and what changes there are in their in ‘bias.”
Now ANZ Bank have constructed a new research indicator as a measure of the RBA’s bias towards future intrest rate movements called: the RBA Bias Index.
This index signals the likely change in the cash rate over the coming six months (see Figure 1 below).
The most recent post-meeting statements have taken the Index a little above one.
This indicates the RBA’s policy bias is starting to lean in a slightly hawkish direction.
While the ANZ don’t think the signal is yet strong enough to shift their view from ‘on hold,’ the evolution of the RBA’s language clearly bears watching.
RBA COMMUNICATION: JUST WORDS?
Following the global financial crisis, interest rates across the world fell to levels close to or below zero.
The importance of central banks’ communication increased, with forward guidance becoming an additional tool to influence financial market developments and drive expectations.
While the RBA tends to provide less active forward guidance than many central banks, its tone is closely watched by market participants, who look for information that might be useful for predicting future moves in the cash rate.
In particular, the market looks at the RBA’s wording around its assessment of current economic conditions, the outlook and the balance of risks.
MOVEMENTS IN THE INDEX
Figure 2 below shows the ANZ RBA Bias Index.
It turned lower than 1 in early 2014, bottoming in February last year.
This implies that the RBA’s communication and forward guidance turned progressively more dovish over that period.
Since then, however, the index has progressively increased and is now close to one.
This suggests that the RBA’s rhetoric has slowly turned less ‘dovish’ and it is now broadly neutral.
Part of the recent rise in the index may reflect the change in the RBA Governor and the statements’ increased focus on financial stability issues.
RBA COMMUNICATION LEADS CHANGES
Using this index, the ANZ found some interesting results.
As shown in Figure 3, our semantic score index seems to lead changes in the cash rate by around six months.
This result is confirmed by a formal Granger-causality test based on a VAR with changes in these two variables.
ANZ’s semantic score index is also strongly correlated with changes in market pricing of the RBA outlook, as shown in Figure 4.
Market pricing for the RBA outlook seems to change much earlier than the lead that the signal actually provides, however a Grangercausality test confirmed that our index precedes changes in market pricing of the RBA by around one month.
Source: ANZ Research
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