One month ago at the June meeting, the RBA left the official rate steady at 1.75% in a widely expected decision. While there was no change made to the cash rate, what caught pundits’ attention at the time was the lack of an “easing bias” which had previously been present in statements which accompanied prior announcements. Westpac had been expecting something from the statement in this regard. “While the cash rate is unlikely to move…The key question here is whether the Board chooses to make more ‘forward-looking’ comments and/or signal a clearer easing bias.”
In this week’s RBA July meeting, once again the official rate was left unchanged at 1.75%. There were some changes to the language and tone of the statement but there was no consensus as to whether an easing bias had been re-introduced. ANZ thought there had been. “The reintroduction of an explicit easing bias, albeit a soft one, into the RBA’s post-meeting statement yesterday opens the door to an August rate cut.” It was a view shared by JP Morgan’s Ben Jarman. “The guidance today more explicitly represents a data-dependent easing bias… Given the trend in core inflation we expect over the next year, this is consistent with the cash rate moving toward 1% as per our forecast.”
Paul Brennan from Citigroup took a different view. “There was some speculation that the easing bias would be reinstated, but in our view this was not likely given the glass half full commentary on the domestic economy from the June Board Minutes…The rise in house prices since the May cut was noted again by the Governor. We believe this is something that the RBA will be closely watching, and which will need to be considered in coming to a decision on any changes to policy.”
A commonly-held position amongst Australian economists is the RBA will not move until June quarter CPI figures are released in late July. ANZ Research summed-up this view after the RBA announcement. “The Q2 CPI is crucial to the decision, but we expect that weak inflation and rising uncertainty will see the RBA cut the cash rate to 1.5% next month.”
Domestic cash markets reacted in a manner which suggests a little more doubt has crept in, albeit in a technical sense, by reducing probabilities of rate cuts in any given month. The market still rates the chance of a rate cut as good, with prices implying an August rate cut as a 51% chance (down from 58%), while a September cut went from 70% to 61%. However, a 25bps rate reduction is fully factored in for December.
