Despite failing to insert an explicit easing bias into its June monetary policy statement, Goldman Sachs believe the RBA will still cut rates later this year.
Here’s Goldman’s Tim Toohey and Andrew Boak assessment of the June policy statement.
The RBA left the cash rate at 2.0% for June, as expected by consensus and GS. The most notable change was the reversion to the more standard final sentence of the Statement which makes monetary policy contingent on information on financial conditions and economic data that is consistent with sustainable growth and inflation at the RBA’s target.
In the May decision, the final sentence tied policy deliberations to the evolution of employment and household demand, and ensuing market confusion over whether this amounted to the removal of the easing bias was suboptimal. In the end the RBA reinforced its easing bias in the Statement of Monetary Policy, the minutes and in a speech, and we see the return to the previous communication model is likely a tacit acknowledgement that the shift in focus ultimately proved unhelpful.
Indeed, there was no mention of employment in today’s Statement and the reference to labour cost growth being “very low” suggests the RBA’s focus has returned to broader growth risks. In this regard, the RBA acknowledged that declines in both mining and non-mining investment are “likely to persist over the coming year”, while the Budget seemed to make little impression on the RBA with public spending still expected to remain subdued and the economy in general expected to grow “at a rate somewhat below its longer term average”.
While there is some conjecture in the markets on whether the RBA’s June policy statement implied an easing bias, Goldman believe it did with Toohey and Boak forecasting that the RBA will cut interest rates to 1.75% in August.
In short, the easing bias remains with the RBA declaring with more force “that monetary policy needs to be accommodative” and it retained the view that further falls in the Australian dollar are “both likely and necessary”. Nevertheless, we view this is an easing bias without immediate intent. We continue to expect the RBA will leave interest rates on hold in July before easing at the August meeting by 25bps.
At present the markets don’t agree with Goldman. RBA cash rate futures currently put the odds of a 0.25% rate cut in August at around 30%.