From the ANZ late yesterday:
ANZ CHANGES RATES CALL TO A 25BP CUT IN AUGUST. CASH RATE SEEN AT 2.25% IN Q4 2013 WITH BIAS TO STILL LOWER RATES
ANZ now expects the RBA to lower the cash rate by 25bps to 2.50% at its August Board meeting unless the Australian dollar (AUD) falls sharply in the interim. However, even if the AUD falls 4–5 cents against the US dollar by early August our view is that this may just delay a rate cut (a ‘high’ Q2 CPI print may also delay further easing). Governor Stevens today hinted that this week’s policy decision was a closer call than widely thought. In our view, combined with the Q2 CPI print (expected to be low) later this month and a full forecasting round which will confirm the soft growth outlook, this points to an imminent rate cut.
We continue to expect the Bank to cut rates a further 25bps in November this year, taking the cash rate to 2.25%. In our view, the Bank is likely to then maintain a bias to lower rates thereafter as the risks to Australia’s terms of trade and national income growth are likely to remain tilted to the downside.
A range of factors have led us to change our view on the RBA cash rate outlook but today’s speech by Governor Stevens was important. The Governor’s speech was another of his considered pieces on the Australian economy’s challenges and prospects but it read in a more downbeat way than many recent speeches. It obliquely addressed the debate about whether Australia faced the risk of recession (noting a number of important differences to previous terms of trade booms – exchange rate appreciation, lack of asset price booms, consumer caution and slow credit growth), while also highlighting the challenges faced by the economy with the ensuing decline of mining investment and the difficulty in transitioning to non-mining growth. While noting the limits of the Bank to fine-tune this transition and remaining confident about a pick-up in housing investment(and we would assess hopeful rather than confident about stronger non-mining investment), Stevens reiterated that the Bank would do what it could within its well-established monetary policy framework to assist in this transition. This framework allows the Bank to support sustainable economic growth, while delivering on its 2–3% inflation mandate on average over the cycle.
Part of the speech noted that many economies had not grown as fast in recent years as before the financial crisis (suggesting the Bank may be countenancing the view that sustainable growth for Australia is not as fast as it once was), while one can continue to infer that the Bank would not be displeased should the AUD continue to fall.
The curve ball in the speech was a departure from the prepared text in his introductory remarks, where he noted that the Board deliberated for a very long time yesterday and then elected to sit with the cash rate unchanged.
At face value this suggests that yesterday’s decision was a very close one and a further rate cut at the August meeting is a strong possibility (after the release of the Q2 CPI and the full forecasting round ahead of quarterly Statement on Monetary Policy), though the lower AUD no doubt was part of the story also. Other possible explanations are somewhat more convoluted: the issues were very difficult; what’s sustainable growth in a slower growth world, when housing is already responding to lower interest rates?; will Australia simply have to suffer slower growth for a while because interest rates cannot stop weaker mining investment? These deliberations mean this meeting’s minutes, to be released on Tuesday 16th July, will be closely followed by the market, though we would expect the market to attach a much higher probability of a further rate cut in at the August meeting, unless the AUD falls sharply further in the interim.
