Bill Evans on the RBA hold

Via Bill Evans at Westpac:

The Reserve Bank Board decided to leave the cash rate unchanged at 1.50%.

This was Westpac’s forecast, although markets were uncertain, with around a 50% probability priced in for a rate cut and 14/26 market economists  forecasting a cut (Bloomberg survey 3 May).There are two main reasons behind this decision. Firstly, the RBA’s response to the recent March quarter inflation report was not as negative as had been expected. In its preview, Westpac pointed out that the RBA had moved from forecasting underlying inflation as the average of the weighted median and the trimmed mean to  forecasting just the trimmed mean.

In the March inflation report, the trimmed mean printed an increase of 0.3% for the quarter, compared to the RBA’s likely forecast of 0.4% – only a 0.1ppt miss. Today, the RBA lowered its trimmed mean forecast for 2019 from 2 per cent to 1 ¾ per cent, and for 2020 from 2 ¼ per cent to 2 per cent. That is only a ¼ ppt reduction in the forecast. As we pointed out in our preview, that reduction compares to a 1 ppt reduction in the forecast from 2 ½ per cent to 1 ½ per cent in May 2016 (in response to a similarly low inflation report for the March quarter). Governor Stevens cut rates in response to that forecast change at the May 2016 Board meeting.

The second issue of importance was the Board’s noting in the April meeting minutes that “members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances”.

Today’s Governor’s Statement strongly emphasised the importance of the labour market, “it [the Board] recognised that there was still spare capacity in the economy and a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings”. As this comment emphasises, the second condition nominated in the April minutes is yet to be fulfilled. It is also important from a timing perspective to note the term “upcoming meetings”. That suggests to us that a common view held by some economists of a move in June  can be ruled out. This condition around the labour market will need more than one employment report to establish a trend.

We feel that this statement fits well with our view that the next move will be a cut in August. Firstly, we expect that the June quarter inflation report will print trimmed mean growth of around 0.4%. With the first six months of the year contributing 0.7ppts to the annual rate for 2019, it is unlikely it will be possible to persist with the 1 ¾ per cent( 2019) – 2 per cent( 2020) scenario and a 1 ½ per cent( 2019) – 1 ¾ per cent( 2020)scenario will be adopted by the RBA  for its August meeting. Recognition that inflation will hold below the bottom of the 2-3 per cent target band for 2019 and 2020 will signal the need for further policy easing.

We also expect that developments in the labour market over the next three months will disappoint the RBA. It is not entirely clear whether they will be satisfied with a stable 5 per cent unemployment rate which the Governor notes is their forecast for the next year, or they require a sustained lower unemployment rate, as noted in the concluding paragraph stating that a further improvement in the labour market is needed. Either way Westpac expects to see a deterioration in the labour market over the next 6 months.

We expect that this sequence of weak inflation and softening labour market data will persist throughout 2019, which is consistent with our growth forecast of 2.2% compared to trend of 2 ¾ per cent. That profile remains consistent with the need for further stimulus at the November meeting following the August cut

Supporting our outlook for the labour market is our research showing that the cyclical sectors of the economy are already in jobs decline although this is being supported by ongoing jobs growth in the non- cyclical sectors.


Westpac forecast that rates would remain steady at today’s meeting.

However we anticipate that developments around domestic demand; the labour market; and underlying inflation will establish a clear case for cuts in both August and November.

This view has been held since February 21.

Westpac’s growth outlook is too high as well now. If the RBA hold off that long we can expect growth closer to 1%:

Should have put the boot in harder, Bill.


  1. DominicMEMBER

    Just fire your last bullet and get it over with. The dirt-poor foreigners spilling through our airports cannot lift this sham economy off it’s death bed so just cut teh rates and enjoy the last convulsion. It won’t make a jot of difference whatever the ‘models’ say.

    As a retailer I can tell you the amount of gear that people are now buying through Afterpay (and similar) is colossal. This is not a positive sign.

    • Even StevenMEMBER

      Any particular sector of retail, Dom? (If you can share). Just trying to get a sense of whether we are talking big purchases (fridges, high def TVs) or lower priced items also.

      • DominicMEMBER

        A mixture of smaller discretionary stuff as well specialist furniture items.

        But what I found a little shocking was that even the higher end stores are now taking Afterpay e.g. Myer and David Jones. Basically everyone

    • Why do you think majority of flowing through AfterPay would be disastrous? Would it be less of concern if the same flow was happening through credit-cards? AfterPay is , imho, a credit card with few cosmetic changes.

      • GeordieMEMBER

        What I see as the biggest difference between the two is that a CC is a line of interest only credit, with minimum repayments each month. Afterpay, Z1P and their ilk are payment schemes, where you get hit with a principal payment each and every period; there is no way to delay default if you don’t have the cash.

        The girls at my wife’s work talk about it all the time. They love it cause they can buy all their nice shyte now, but hate it because they know they’re spending next months pay well in advance and before any allowance has been made for living costs. Yet they carry on using it recklessly. It has the potential to end very badly.

      • DominicMEMBER

        Not the end of the world but terms and conditions of Afterpay et al are structured such that they seem fairly benign to the financially illiterate and I believe many of these people don’t qualify for a CC – but that may not be the case, it may simply be that the payment terms appear more friendly, idk. I’ve had people contact us and say they can’t make a purchase unless we have Afterpay so that does set the alarm bells ringing a bit.

    • Agreed – all these ‘innovations in credit’ are basically just payday lending with a better looking logo and app. The sheep are still getting shorn.

  2. MB has been calling for interest rate cuts for years, everyone else seemed know what the outcome would be, SKY HIGH asset prices, What the hell do you think another 50bps is going to do? The world should have taken it’s medicine years ago and gone through the cleansing recession, Looks to me like Ludwig von mises and his fellow Austrians economists have been right all along, you cant control business cycles with interest rates for ever!