Bill Evans: RBA readying rate cuts

Via Bill Evans at Westpac:

As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%.

However, our research shows that there has been a very significant change in the Governor’s Statement for this month. Recall that Governor Lowe has not changed monetary policy since he became Governor in September 2016. Also note that the key concluding sentence, which has been used in every Statement since October 2016 has been “the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. The clear implication behind that statement is an expectation that policy was likely to be on hold for a considerable period. As we have seen, that was an accurate assessment.

In the April Statement, he has changed this language for the first time ever. He still notes that “the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting”. However, he then changes tact with a new sentence. “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”. Although, a cursory glance at this sentence might not indicate any change in stance, it does give greater emphasis to the fluidity of the current situation. If this change was not intended, then clearly he would have continued with the approach that has marked his time as Governor.

Therefore this change appears to be a very clear intention to signal  that policy is much more ‘live’ than has been the case since the Governor was appointed.

This signal is consistent with Westpac’s expectation that the Board is likely to adopt an easing bias following the May Board meeting. Our thinking behind that approach has been that the Statement on Monetary Policy for May will include a downward revision of the Bank’s growth forecasts. Further support for this view is apparent in the exclusion of the RBA’s current growth forecasts in the April Governor’s Statement. Arguably , this  indicates an uneasiness with the 3 per cent for 2019 and the 2 ¾ per cent for 2020.

In the RBA’s defence, note that the March Governor’s Statement came before the release of the December quarter National Accounts, which showed that six month annualised growth had slowed to 1 per cent in the second half of 2018. We expect that the RBA will lower its 2019 growth forecast from 3 per cent to 2 ¾ per cent, and the 2020 forecast from 2 ¾ per cent to 2 ½ per cent. Those forecasts are either at or below ‘potential growth’ (assessed as 2 ¾ per cent).

In commenting on the low growth rate for 2018 of 2.3%, the Governor pointed out “the GDP data paint a softer picture of the economy than do the labour market data”. Arguably, the RBA may hold off from a specific easing bias( despite forecasting below trend growth), attributing this tension in the data as key to the outlook for policy.

Westpac has argued that the actual rate cut will not occur until August, when a further downward revision of forecast growth will be required and evidence will be building of a slowdown in the labour market.

Last week, we wrote on the potential impact of tonight’s Federal Budget on monetary policy. If the Governor saw the Budget as a significant swing factor in his thinking, it is unlikely that he would have chosen to change the language in the Statement just before the announcement.

It is our view that a boost to disposable income from tax cuts will certainly be of some assistance to the economy, but is unlikely to sufficiently offset the near term drag on incomes and spending from the negative wealth effect from falling house prices; weak wages growth; and a major downturn in activity in the housing market.

Conclusion

We were a little surprised with the Governor’s change in stance but find it consistent with our general view that the RBA is on track to adopt an easing bias in May  and cut the overnight cash rate in August and November.

And that’s why Bill gets paid the big bucks.

Comments

  1. They will deliver a dovish SoMP and Statement in May; keep their heads down over the election and cut in June…

    At least that’s what I’ve been telling my clients since H2 2018. Of course ANZ will change their call once the OIS is fully priced and HSBC (Bloxo) will fall a hike the day they cut…

  2. Bill Evans showing masterly translation of RBA nuance absent from more hysterical commentary. Clearly housing a very strong headwind. But ok as long as jobs and incomes hold up to avoid forced sales and the downward spiral commencing. Tapdancing on the edge and hoping there is not a new gust of wind ..

  3. Jumping jack flash

    Can’t cut, won’t cut.
    But when they do cut it won’t do anything.

    They’re playing their cards very close to their chest while talking it up big.
    As soon as they cut and reveal their hand, it will quickly become obvious they got nothing… and then the real fun starts for the banks.

    Their prime directive is to protect the banks. The banks have got a trillion-odd nonproductive debt dollars attached to debt-inflated asset prices. Its a pretty risky situation, and so their interest rates should be high to reflect that, but so long as we all pretend everything is awesome, and keep saying the houses are worth whatever they need to be worth to support that much debt attached to them, and the RBA steps up and says there is no problem because unemployment, but if there was a problem the problem is surely contained, and furthermore, if there was a problem, which there isn’t, then all they’d need to do is cut interest rates and maybe throw a bit of QE around and everything will be all Millhouse again, then the banks’ interest rates stay low, and everything is fine.