GOLDMAN SACHS: Why the RBA's easing cycle isn't over yet

With the RBA removing its explicit easing bias from their May monetary policy statement, market expectations for further rate cuts in 2015 are diminishing fast.

However Goldman Sachs’ head of Macro Research in Australia and New Zealand, Tim Toohey, is unconvinced.

Reflecting on the hawkish market reaction to the policy statement – something that saw the Australian Dollar surge while bond yields and equities fell – he noted it wasn’t unusual for the RBA to not insert an explicit easing bias immediately following a rate cut, citing February as a recent example.

Looking ahead, Toohey expects Friday’s statement on monetary policy released by the RBA to set the record straight (emphasis added):

We would not be surprised to see an easing bias expressed more explicitly in Friday’s Statement on Monetary Policy (SMP). With May’s rate cut closely following 1Q 2015 CPI, we also believe the timing of today’s decision underscores the importance that the RBA places on actual CPI outcomes in framing its outlook for inflation – raising the risk that the rate cut we currently have penciled in for July is delivered a month later in August (following 2Q 2015 CPI). In the interim, we expect Friday’s SMP to reveal further growth downgrades, and to continue to refocus attention on trends in household demand (as opposed to broader measures of aggregate demand). All in all, we believe the coming months will see ongoing benign inflation and note that our proprietary indicators are flagging downside surprises on the growth/employment front. Against the backdrop of the rising risk of slippage in the timing of the rates lift-off in the US, we continue to lean towards another rate cut this year.

Clearly, Toohey remains of the view that the RBA’s easing cycle isn’t finished yet.

Should the RBA adopt an easing bias within Friday’s statement on monetary policy market expectations, this time for further easing, will return as quickly as they faded today.

All will be revealed at 11.30am in Sydney on Friday.

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