CBA Economics update

RBA Board Meeting – May 2013

■ The RBA cut the cash rate by 0.25bps to 2.75% at its April Board meeting.

■ Just prior to the announcement, the market was pricing in a 48% chance of a 0.25bps cut.

■ The RBA sees some residual ability in its inflation outlook to cut rates again.  Given this, we have added a final rate cut to our forecast profile. 

■ Focus now turns to the quarterly Statement on Monetary Policy on Friday.

Summary

The RBA cut the cash rate by 0.25bps to 2.75% at the May meeting.  The meeting was “live” but the outcome was uncertain with the market pricing the odds at roughly 50/50 of a rate cut prior to the announcement.  Most economic commentators thought that the RBA would remain on the sidelines today.  And today’s statement would have justified a “no change” decision.  The RBA’s views on global growth, domestic growth and the transition to non‑mining led growth seem little changed.  Instead, the RBA has used the lower‑than‑expected QI CPI to take the opportunity to speed up the baton pass to the non‑mining sector.

An easing bias has been in place since the last rate cut in December.  The RBA has routinely noted in the period since then that a favourable inflation outlook provided scope to ease policy should that be necessary to support demand.  In today’s statement, the RBA noted that it “decided to use some of that scope …….. to encourage sustainable growth in the economy”.  So it appears that the RBA sees some residual ability to cut rates again.  Given this, we have added a final rate cut to our forecast profile.  At this stage, a rate cut to 2.5% in August following the release of the QII CPI would look the most appropriate time.     

In today’s statement, the RBA noted that growth appears to be a bit below trend so far in 2013.  And it also noted that employment has grown, albeit at a pace slower than the labour force.  As such, the unemployment rate has risen, though remains relatively low.

Focus now turns to the quarterly Statement on Monetary Policy on Friday.  We expect the Statement will contain downgrades to the RBA’s near‑term inflation forecasts.  But GDP growth downgrades are less certain.