Goldman: RBA to cut in May and July

From Goldman:

Bottom Line: As expected, the RBA left the cash rate unchanged at 2.00% in April, the 11th month of unchanged monetary policy, however, we continue to expect an interest rate reduction on the 12 month anniversary of the last rate reduction. Its clear that the RBA’s easing bias remains and in our view increased in April. The key change was the RBA’s rather blunt assessment that “an appreciating exchange rate would complicate the adjustment underway in the economy” having also acknowledged that Australia’s terms of trade remain “much lower than they had been in recent years”. The combination of these two statements makes it clear that the RBA sees the A$ as overvalued at current levels and as a risk to its growth expectations.

There was also a notable shift in the key criteria to warrant an interest rate response. Firstly, the RBA removed the requirement that some evidence “that recent financial turbulence portends weaker global and domestic demand” would need to be accumulated. Seemingly, this criteria has already been met. Secondly, the policy focus in now narrowed to the outlook for inflation and labour market conditions. In respect to the latter there is a tacit acknowledgement that the labour force data has deteriorated in 2016. No longer does the RBA set the criteria for easing on “whether the improvement in labour market conditions is continuing”. Instead, the RBA assessment is “whether the improvement in labour market conditions evident last year is continuing”. So far in 2016 the evidence is clearly that it is not. Employment momentum has clearly slowed following a 6.6k decline in the past 3 months together with tentative signs of a peak in the growth in ANZ job advertisements. Moreover, this comes in an environment where investment expectations suggests private business investment could decline 20% in 2015-16 and 12.5% in 2016-17, retail sales have moderated, building approvals are in clear trend decline, motor vehicle sales momentum is lacklustre, and the TD monthly inflation gauge suggests inflation is running well below the RBA’s inflation target.