From Westpac’s Bill Evans:
The Reserve Bank Board decided to leave the cash rate unchanged at 2.25%.
When we forecast two rate cuts in February and March back on December 4 last year we expected that for such a significant about turn in policy the Bank would have been comfortable with consecutive moves. Since the February move we saw no compelling reason to change that view. That view has turned out to be a misjudgement. However it appears that the Governor has adopted a strong easing bias, effectively indicating that another cut can be expected over the next month or two.
It is worth noting part of the key final paragraph in the statement: “At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead.”
In effect, the explanation behind not moving was that it was too soon after the previous move rather than that there had been any changed assessment of the economic landscape.
History shows us that the language used in this paragraph is the strongest form of easing bias.
In the sixty seven post meeting statements ( excluding today) by the governor since the beginning of 2009 “for the time being “ has only been used on eight occasions.In that time every governor’s post meeting statement that has included the term “for the time being” has preceded a rate move. On six occasions it was the following month and on two occasions it was two months later.
That signal puts the next move firmly into the April/May window.
Most of the key arguments used to explain the February rate cut were repeated in this statement: “growth is continuing at a below trend pace, with domestic demand growth overall quite weak”; “the economy is likely to be operating with a degree of spare capacity for some time yet”; “the unemployment rate has gradually moved higher over the past year”; “dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of cities over recent months”; “a lower exchange rate is likely to be needed to achieve balanced growth in the economy”’; and “it appears likely that inflation will remain consistent with the target over the next one to two years even with a lower exchange rate”.
The only somewhat different analysis in this statement refers to the outlook for growth in China. Today the Bank has forecast that “China’s growth slows a little from last year’s outcome”. In previous statements China’s growth was described as “in line with policymakers’ objectives”.
In delaying the next cut while at the same time, if precedent is to be followed, effectively promising another imminent move the Bank is adopting the cautious approach which on occasion can be expected from central banks. One possible explanation is that the Governor sees 2% as the natural floor for rates and is ‘conserving firepower’. However, it appears that in 2014 he drew the line at 2.5% but was prepared to go below that level when circumstances changed for the worse. Even though he may prefer to maintain a 2% floor in this cycle there is no doubt that, should the circumstances require, he will be prepared to push rates even lower.
Conclusion
We expected that the case had been made for a move of more than just 25bps in February and that a follow-up move in March was the best option. This statement is consistent with the Bank also believing that more easing will be appropriate but has taken a cautious approach.
On the analysis above and our own assessment of the economic situation we expect that a follow-up move can be confidently anticipated in April/May with a bias for April.
