Find below three bank takes on today’s meet. ANZ and Westpac are right in arguing that there are more cuts to come. HSBC is wrong in arguing the easing cycle is nearly over, clinging to the flotsam of a fading China dream.
It’s as clear as day in the following statement from Cap’t Glen:
Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.
Westpac:
As expected, RBA cuts the cash rate by 25bps to 3.25%; expect another move in November
As we had predicted the Reserve Bank Board decided to lower the cash rate by 25bps to 3.25%. Our scrutiny of the Governor’s statement indicates that the case is still strong for a further rate cut in November of 25bps.
In comparing the October statement with the statement in September we see a number of significant changes.
Firstly the Bank is much more downbeat on the labour market.For the first time it has pointed out that despite the low unemployment rate the labour market has “generally softened somewhat in recent months”. This observation is consistent with our view that a number of other labour market variables around participation; confidence; employment intentions; and employment growth are all pointing to a weak labour market.
The second important observation is that for the first time the Bank is recognising the need for other components of demand to regain some strength because the peak in the resources investment cycle will occur next year. This recognition changes the required emphasis for policy from containing alleged price pressures emanating from income and activity effects of the mining boom to recognising that demand conditions are likely to soften markedly from 2014 unless there is a boost to the traditional interest rate sensitive sectors of the economy including house construction, non residential construction and consumer spending.
In September, we saw recognition that the commodity prices have fallen sharply and that the terms of trade have declined. In October the Bank goes further to point to a fall of over 10% with the likelihood that the terms of trade will fall even further. This is linked to a resilient Australian dollar which “has remained higher than might have been expected”.
We have long argued that interest rates are only slightly below the ‘neutral’ level. The Bank points out that rates to borrowers are indeed “a little below their medium term averages” and yet “credit growth has softened of late”.
In September the Bank referred to “a more subdued international outlook”. In this statement the Board goes further to argue that “on the back of international developments the growth outlook for next year looked a little weaker”. These developments mainly relate to “uncertainty about near term prospects” in China and that around Asia generally growth is being dampened by “the more moderate Chinese expansion” and “the weakness in Europe”. There is no change around the view that Europe is contracting and US growth remains modest.
Of course our attention now moves to whether there is any indication in the wording of this statement that the Board feels enough has been done for the time being. The words that traditionally are used to indicate that assessment are along the lines of “policy is appropriate”. When the Bank wants to allow scope for further moves it will describe its decision in the past tense rather than making an assessment that policy is now appropriate. Accordingly, the final sentence is very important: “The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative”. This in no way indicates that there is an intention to hold rates steady for the time being- flexibility has been retained to move again.
As we discussed in the weekly note the inflation report on October 24 will be important for the November decision. In fact there was one slight hawkish aspect to today’s statement. That is, whereas in past statements the Bank referred to “the Bank’s assessment is that inflation will be consistent with the target over the next one to two years” today’s statement makes the subtle change “the Bank’s assessment remains, at this point, that inflation will be consistent with the target over the next one to two years”. Westpac currently expects that underlying inflation will print around 0.8%qtr with 0.3ppts of that being directly attributed to the carbon tax. The ABS will not estimate the impact of the carbon tax on that print and it will be up to the RBA and Treasury to make their own informal assessment. That event therefore represents more risk than a normal CPI but we are confident that the other arguments being used to justify today’s move will adequately compensate for some uncertainty around the inflation report.
The outlook
The key aspects of this statement not only justify today’s decision but also provide a convincing framework for a follow up move in November.The inflation report on October 24 will be affected by the introduction of the carbon tax but we do not believe that there will be sufficient uncertainty around that report to offset the other reasons around the deteriorating international outlook,the need for other components of demand to compensate for the fall in mining investment in 2014;the high Australian dollar which is tightening financial conditions; and the softening labour market to preclude another move.
It has been Westpac’s forecast since last May that the low point in this cycle will be a cash rate of 2.75% and we believe that policy is on track for that result with the final cut likely to occur in the first quarter of 2013.
ANZ:
HSBC:
