Following yesterday’s RBA wedgie of bullish economists, Bloxo responds:
The RBA cut its cash rate to 2.25% today, in one of the most finely balanced decisions in many years. Going into the meeting, the market priced in a 60% chance of a cut, while the Bloomberg survey suggested that 21 of 27 economists expected a hold, including HSBC. The statement left the door open for further cuts, although it provided little specific forward guidance, with the previous ‘period of stability’ language removed.
The statement said that the cut was motivated by the RBA’s view that domestic demand was ‘overall quite weak’. This is somewhat surprising, as the range of indicators has generally shown that conditions have been improving in recent months, including building approvals, employment, credit growth and underlying inflation. The RBA also noted that the “Bank’s assessment is that output growth will probably remain a little below trend for somewhat longer… than earlier expected”. It is possible that the RBA’s own extensive (and unpublished) liaison with businesses is revealing weakness that is not apparent in the publicly available data. Friday’s official statement could provide more details.
The rate cut will almost certainly boost an already booming housing market. As the RBA noted in the statement, it “is working with other regulators to assess and contain economic risks that may arise from the housing market”. A housing bubble in the Sydney market is now a key risk to the medium-term outlook.
What is less clear is whether the rate cut will lift business confidence, with Governor Stevens noting in December that, even in his view, it is “not that the cost of money is too high”, which is constraining businesses’ hiring and investment decisions. Lower rates do, however, vindicate the market’s pricing and help to keep downward pressure on the AUD, which should support local growth.
Given the RBA’s dovish tone, we now expect a further cut to 2.00%, probably in May, after the next CPI print. The AUD is expected to head towards USD0.70 by H2 2016.
Next cut in March, CPI is irrelevant.