Given Mr Eslake recently described the RBA as “insane” for cutting rates, and his central position on the scurrilously hawkish Shadow RBA, this followingis perhaps singificant from SAul today:
The minutes earlier in the week stressed that the RBA was wanting to assess the data flow further before making any decision whether to ease policy further. They specifically singled out this Q1 read on inflation as being important. In our view, these data neither added to nor detracted from the case to ease policy further. So our expectation for policy remains unchanged. Inflation will not prevent the RBA from cutting rates again at its May meeting – should it judge that the economic outlook needs further support. We think that on balance it will judge that further support is necessary, despite recent improvements in labour force data, but acknowledge the decision will be a finely balanced one. Subsequent to this move we do not think that any further easing, to take the cash rate below 2%, (as markets continue to price) is warranted at this stage.
Meanwhile, Bloxo sits on the fence:
For the Australian economy, the iron ore price is always an important variable. Iron ore accounts for around 22% of Australia’s exports and 4% of GDP. The rally in the iron ore price is therefore an important story for the RBA. Despite having signalled, in February, that it intended to cut the cash rate further, the RBA kept rates steady in both March and April, surprising the market.
For the next meeting, in early May, the market sees the decision as finely balanced, as do we. On the one hand, underlying inflation is in the lower half of the 2-3% target band, at 2.3% y-o-y, and growth is below trend, suggesting the RBA could cut rates further. On the other hand, recent timely data on jobs, retail sales and even the Q1 inflation print surprised on the upside, and the Sydney housing market is still booming, suggesting they could decide to sit still. With such a finely balanced decision the track for the iron ore price could tip the scales for the RBA.
Importantly, although the RBA signalled, back in February, that it expected to need to cut further in coming months, the central bank does not map out a track for the cash rate in advance. Instead, the decision is very much made month-to-month. As is typical, the RBA will no doubt be holding its internal policy discussion group meeting next Wednesday and finalizing its policy recommendation on Thursday. This one could go down to the wire, so watching all the timely information will be important. It will also be important to listen very carefully for hints from the RBA Governor, Glenn Stevens, as he is expected to deliver a speech on 28 April, ahead of the 5 May board meeting.
Yes, difficult one to call.
