First, Paul Bloxham at HSBC:
The RBA cut its cash rate by 25bp to 2.50%, as expected. However, the statement was less dovish than previous ones, as it did not explicitly indicate that the inflation outlook provided ‘scope’ for further easing from here, as previous statements had done. They did, however, still suggest that the AUD was a bit too high for them to be comfortable. Markets are currently pricing in a further cut this year. While this is possible, we are of the view that today’s cut could be the last for this easing phase, as the lower AUD is doing a lot of the work for the RBA already and is also an upside risk to the inflation outlook.
Facts
– The RBA cut the cash rate by 25bp to 2.50% today (26 of 27 economists in the Bloomberg survey expected a cut, including HSBC, and this was 106% priced just prior to the announcement).– The statement suggested that ‘in Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment.’
– It also noted that while ‘the Australian dollar has depreciated by around 15 per cent since early April … it remains at a high level.’
– Finally, while the statement said that ‘the Board [had] previously noted that the inflation outlook could provide some scope to ease policy further, should that be required to support demand’, which supported their decision to cut the cash rate today, the statement did not repeat that the inflation outlook left further scope to cut rates as previous statements have done.
Implications
Today’s rate cut was unsurprising. In the lead up, 26 of 27 economists’ expected a 25bp cut, including HSBC, and it was more than fully priced (reflecting the very slim possibility of a 50bp cut).The RBA’s post-meeting statement was a little less dovish than previous statements. While they noted that the inflation outlook gave them ‘scope’ to cut rates today, they did not explicitly note that their inflation outlook would allow them room to move again, as they had done in previous statements.
Now the question is whether there are further rate cuts yet to come? In our view, this may be the last cut for the easing phase, though much depends on the AUD. Indeed, the outlook for the cash rate and AUD remain intertwined. While markets are currently pricing another rate cut this year, our view remains that it may not be needed. The recent fall in the AUD may also limit the extent to which further rate cuts can be delivered, as it drives up inflation.
We expect low interest rates to continue to support the housing market and for this traction to begin to spread to the broader economy in coming months. We expect the election may help this process, as it should reduce political uncertainty which may lift business and consumer confidence. We also expect the effect of the lower AUD to feed through and provide support for the exchange rate sensitive industries, including tourism and manufacturing, but also lift inflation.
With a Federal election now due to occur on September 7, it seems highly unlikely that the RBA would cut rates next month (4 days before the election) – meaning the next likely opportunity is October or November. Between now and October/November we have a local Federal election, on September 7, and there are significant global developments that may have a bearing on the AUD in particular. Further weakness in the AUD may obviate the need for another rate cut, as it would be supportive of growth, while a lower AUD would also start to see the risks to inflation shift to the upside.
The RBA is due to publish their quarterly official statement on Friday, which will provide more detail on their outlook. We expect they may nudge their growth forecasts downwards for this year but may lift their inflation forecasts, given the recent fall in the AUD.
Bottom line
The RBA cut the cash rate by 25bp to 2.50% today, as expected.The statement was less dovish than previous statements.
Our view remains that today’s cut could be the last for this easing phase, though much relies on the outlook for the AUD.
I’ll simply note that this is the third cut in a row that Bloxo has called “bottom” for the cycle. I don’t disagree with the analysis. The problem is it is only addressing half of the forces at work. The other half is the tumble down the mining investment cliff. It’s not the dollar that will determine the next cut, it is the speed at which the cliff presents itself.
Next, Bill Evans:
As widely expected the Reserve Bank Board decided to lower the cash rate by 25bps to 2.50% at its August Board meeting.
For us by far the most significant aspect of the Governor’s statement was the decision to move back to a neutral bias from the consistent easing bias that we have seen in recent statements.
It does not hold that a central bank should necessarily move to a neutral bias following a rate move. An easing bias was used in the May statement despite delivering a rate cut. The words used were: “The Board has previously noted that the inflation outlook would afford scope to ease further … at today’s meeting the Board decided to use some of that scope”. That is a more dovish explanation for a rate cut than that used today “The Board judged that a further decline in the cash rate was appropriate”.
We were expecting that the Bank would choose to maintain downward pressure on the AUD by repeating the rhetoric from the June and July statements which said: “The Board judged that the inflation outlook … may provide some scope for further easing should that be required to support demand”. In today’s statement the key final sentence was: “The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time” – a clear neutral bias.
Other aspects of the statement were more encouraging from the perspective of our forecast which has been and remains for another cut in November. Firstly, the statement followed the structure in July by pointing out that although the Australian dollar has depreciated 10% since early April it remains at a high level. The only change in this statement was to revise that change up to 15%.
The other really important point was that despite the 15% fall in the currency the Governor repeated his confidence that inflation pressures are expected to remain under control. Comments on the real economy did not change from the July statement with growth being described as “a bit below trend” and the unemployment rate being recognised as edging higher.
The international outlook remains unchanged with global growth being described as “running a bit below average this year”. A new observation is the linking of volatility in the global financial markets with a downturn in a number of emerging market economies. That link to emerging markets was not made in July.
Conclusion
In choosing not to maintain a clear easing bias it seems very unlikely that the September meeting will be ‘in play’. Of course, with that meeting being timed for four days before the Federal election it would have been quite surprising to see any change in monetary policy so close to an election. We are not unnerved by today’s approach because it in no way implies that rates have reached some form of institutional low and that should the economy evolve in the way we expect the Bank will cut rates again.
The calling of the election, by providing some political certainty by early September, might boost confidence measures but hard decisions showing up in the data to raise employment and investment seem a lot further off. We also agree with the Reserve Bank that the fall in the currency is most likely to impact importers’ margins rather than consumer prices. A much stronger demand environment would be required for importers to confidently pass on price increases. We have not doubt that the Bank expects there is more work to be done. Note that the Government raised its unemployment forecast for 2013-14 from 5.75% to 6.25% and expects it to remain there over the course of the next year. We expect that the Reserve Bank feels the same way, although Friday’s Statement on Monetary Policy will only include growth and inflation forecasts.We expect the Bank would therefore have no hesitation in cutting rates again once more information is available on inflation which will print in late October and the response of business/consumers to the election result has been clearly signalled.
We also believe that these dampening forces will be sustained through into early 2014 providing scope for another cut in February.
This is about as close as an institutional economist comes to saying “you’ve stuffed up”. I agree, even if the RBA thinks it won’t cut again, the easing bias should have been retained to pressure the dollar.
As I’ve noted many times, the RBA has been hinting its lack of desire to cut for some months. I suspect that this is because it is worried about house prices. That is now policy and means the dollar will not fall further unless via some external force. The most obvious is the “on again, off again” US “taper”. Let’s hope it comes ASAP because at 90 cents the dollar is not low enough to do squat for the non-mining economy.
And my view now? It still don’t think we’re at the bottom. The best case scenario is that we get a slow slide in resources capex offering some time for non-mining investment to catch up and for the US taper to transpire and fell the dollar. But that is not my base case.
I still think the mining bust will proceed more quickly than current data suggests and that it will get worse as iron ore and coal falls in the first half of next year.
So, more cuts to come, but paced against economic weakness, not getting ahead of it.
