Via Bill Evans:
As expected the RBA Board lowered the cash rate by 25 basis points at its October meeting to 0.75%.
Westpac acknowledges that result given that we were the first forecaster to call the RBA cash rate below 1% (Bloomberg survey – May 24). Up until that time the 1% had been viewed as the effective floor for the cash rate.
Furthermore, back on August 2 we were only 1 of 3 (24 in Bloomberg survey) who called the next cut in October. Over the course of the subsequent weeks markets and forecasters moved in that direction such that market pricing gave an 80% probability to a cut today and the majority of forecasters moved to identify October as the next move.
Westpac still expects that there is likely to be another cut in this cycle. We have identified next February as the likely timing.
The Governor’s Statement certainly opens the door to even lower rates although a follow up move in November seems unlikely.
He noted, “The Board will continue to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
Note the choice of the term, “if needed” which usually implies that time will be taken to assess the impact of the three cuts in this cycle before moving again.
Furthermore he has, for no reason that is justified by the data, adopted a bolder objective than had been the case before by aiming for “full employment” rather than the more modest, “reduce unemployment” that we saw in September.
It is also very important to note that a new key reason behind the decision figured in today’s Statement. “The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.” Clearly, the RBA is concerned not to allow unwelcome upward pressure on the Australian dollar as other central banks eased.
Overall, the themes in the Statement are in line with previous Statements: global growth outlook risks tilted to the downside; further monetary policy easing by other central banks is widely expected; Australian economy can sustain lower rates of unemployment and underemployment; inflation pressures remain subdued; little upward pressure on wages.
However, while the Governor confirmed the inflation forecasts of the Statement on Monetary Policy in August he did not do the same for the growth forecasts. In September he noted, “growth in Australia is expected to strengthen gradually to be around trend over the next couple of years. In the October Statement he cautiously refers to “a gentle turning point appears to have been reached” with no confirmation of the “trend growth outlook in 2020”.
Based on previous experience this suggests that the RBA may be preparing to lower its growth forecast for 2020 when we see the revised forecasts on November 8.
The commentary around the housing market is also interesting. While evidence of a recovery in prices in the established market is recognised he qualifies the outlook by pointing out that dwelling activity has weakened and credit growth remains low.
On July 24 Westpac added a further rate cut to 0.5% by February to its rate profile. Today’s decision and the associated Statement make a clear case that the cycle is not over yet.
For that reason we are encouraged to expect another cut. It seems highly unlikely that the Bank would opt for back to back cuts as we saw in June/ July to signal the beginning of the cycle.
One of the key reasons why we favoured October against the Consensus view of November was that October provided the flexibility to move in December should global conditions deteriorate sharply. That is not our forecast so we remain comfortable with a February move for the next and last stage of this interest rate cycle.
Factors that will be important going forward will be the impact of this decision on private sector rates and the RBA’s confidence around unconventional policies.
It seems to me a reasonable supposition that 50bps is the terminal rate for now. The RBA will probably want to keep some ammo and the banks will be screaming blue murder.
That raises the prospect of unconventional measures sooner rather than later. I no longer think crisis beyond the everyday will be required to trigger them.