From Westpac’s Bill Evans:
The Reserve Bank Board decided to hold rates steady at 2.25% at their April meeting. There were no significant changes in the wording of the Governor’s statement from the statement released following the March meeting. The key terminology around the policy outlook remained the same: “It was appropriate to hold interest rates steady for the time being”; “further easing of policy may be appropriate over the period ahead”.
Sentiment around the Australian dollar was unchanged: “a lower exchange rate is likely to be needed to achieve balanced growth in the economy”. The degree of concern around the AUD is emphasised by the Bank actually providing a ‘forecast’ for the currency by noting that “further depreciation seems likely”. That is a different approach to previous statements when it has been described as “above most estimates of its fundamental value”.
General commentary around the economy continued to refer to its operating “with a degree of spare capacity” and growing at a “below trend pace with overall demand growth quite weak”.
Since the Board meeting in March the price of Australia’s major export commodity, iron ore, has fallen by around 30%. The Bank noted that prices for our key exports have been falling and implied that it will be necessary to further revise down forecasts for the terms of trade. This is particularly significant because it will affect the fiscal outlook and further constrain nominal income growth in 2015.
Outlook
Since the March meeting we argued that another rate cut could be expected in the April/May window. Last week we opted for April given the deteriorating outlook for our terms of trade and the likely effect that lower rates would have on demand and the Australian dollar. Of course, the concern with that call was the Bank’s propensity to prefer moving in the months which coincide with the Statement on Monetary Policy(SOMP). Those months are February, May, August and November. It appears that this policy approach has been taken again.
Recall that at the time of the February SOMP the Bank assumed a second rate cut when formulating its growth forecasts. Developments in the economy since then are unlikely to have dissuaded them that another cut is appropriate. That is certainly consistent with the ongoing choice of language: “appropriate … for the time being”. Readers will recall that following the recent introduction of that term in the March statement we observed that on the eight occasions that it was used since the beginning of 2009, there has always been a follow up move within two months.
Accordingly we expect that the Bank will choose to cut by 25bps at the next meeting on May 5 and then hold rates steady for some time until it can assess whether its current growth forecast for 2016 of 3.5% is achievable.
