n The RBA delivered a larger than expected 0.5% cut in the cash rate to 3¾%, after the May Board meeting.
n The key line in the RBA media release accompanying the latest policy move was that data “in recent months suggests economic conditions have been somewhat weaker than expected, while inflation has moderated”. This indicates that further policy easing will be on the table for debate and discussion in upcoming monthly Board meetings.
n Thus an easing bias remains firmly in place and we are adding a further 25bpt rate cut in August to our forecast profile as a result, taking the cash rate to a likely 3½%.
The RBA’s capacity to surprise continues with a larger than expected 50bpt rate cut resulting from today’s Board meeting. The cash rate now stands at 3¾%, the lowest since early 2010 and some 100bpts below the most recent peak of 4¾%.
The larger than expected move appears designed to ensure that a significant reduction in lending rates follows and to provide a positive “shock” to consumer and business confidence. The size of the cut should take discussion of a follow up move in June off the table. But comments that inflation “will probably be lower than earlier expected” implies inflation forecasts towards the bottom end of the RBA’s 2‑3% target range. This sort of forecast is code for an easing bias.
As a result we are adding a further 25bpt rate cut to our forecast profile. Today’s decision was very closely tied to the QI CPI readings. Having got ahead of the curve in a sense we think that any follow up move will be tied to the QII price data (due late July). We have pencilled in the August meeting as the most likely time for a move.
Revised growth and inflation forecasts in the RBA’s Statement on Monetary Policy on Friday will provide some idea on how far the easing cycle will go.
Speculation built up in recent weeks that the RBA would definitely deliver at least a 0.25% rate cut at today’s meeting, with an outside (30%) chance that the RBA would engineer a chunkier cut of 0.5%. In the event, the RBA opted for the larger 0.5% move in view of recent domestic indicators pointing to weaker than previously anticipated economic growth and a more tame inflation outlook.
The wording of today’s accompanying media statement suggests that another rate cut will be on the table for discussion at Board meetings in the months ahead. While the pace of domestic activity has been a little weaker than expected in recent weeks and months due diligence had required the QI CPI (released 24 April) outcome would need to be analysed by the central bank before it considered a further step to ease monetary policy. The tame QI CPI showing underlying inflation at the bottom edge of the RBA’s 2‑3%pa target zone, and the headline CPI even lower at 1.6%pa threw the door wide open for the May rare cut. And the RBA duly delivered with gusto.
The policy debate in early 2012 has focussed on weakness in some domestic indicators that have signposted below‑trend growth persisting in HI 2012, and lingering fears about Chinese and European prospects. The impact of the high Aussie dollar has also featured in the debate.
The RBA’s current interpretation of these events is:
· Global output growth is likely to continue to grow at a below trend pace this year;
· Growth in China has moderated, as was intended, and is likely to remain at a more measured and sustainable pace in the future;
· Elsewhere, conditions in Europe remain “very difficult”, and “Europe will remain a potential source of adverse shocks for some time to come yet”, while the United Sates continues to grow at a moderate pace;
· Local below trend output growth has not only been affected by temporary factors, such as national disasters in Queensland and elsewhere, but also by “the persistently high exchange rate”;
· As a result, the Bank said that there was “considerable structural change occurring in the economy”; and
· While labour market conditions have softened during 2011, the unemployment rate “has remained little changed at a low rate”.
The weaker data flow has also been skewed towards those parts of the “patchwork” economy, such as retail spending and residential construction. In contrast, ABS data shows record high levels of actual and planned mineral exploration spending.
A key marker for possible further rate cut action by the central bank in the coming months will be the monthly jobs data. The RBA has elevated the importance of this data in recent commentary by noting that the unemployment rate is probably the best guide to how the opposing forces at work in the economy are balancing out. An upward trend would be the signal that the negatives hold sway.
The above article is courtesy of the CBA Economics Department