In a meeting where the Reserve Bank of Australia (RBA) didn’t reduce interest rates, the June monetary policy statement has certainly created some talking points, particularly surrounding the outlook for Australian interest rates.
The absence of an explicit easing bias, a guidance to markets, households and businesses that rates would likely fall further, came as a surprise to many, especially given the RBA’s own forecasts don’t see core inflation moving back to within its 2-3% target band until at least mid-2018.
The substantial downgrades made to its inflation forecasts, something that led many to formulate the view that interest rates were still likely to move lower, have now been in place for over a month.
In that time there has been no meaningful attempt from the RBA to correct that expectation, bolstering confidence that another rate cut was coming.
Now, with no explicit easing bias forthcoming in the June policy statement, there’s more than a little confusion doing the rounds in financial markets.
That point is underlined in the economic research notes that have hit our inbox this afternoon, with great swathes of commentary devoted to explaining the absence of an easing bias.
Here’s what they’ve made of statement, and whether it means that the RBA is likely through with cutting rates.
Bill Evans, Westpac
In March 2015, following the decision, which came as some surprise, to cut rates in February 2015, the Bank chose to adopt a clear easing bias. That bias was acted on in May 2015. It was our expectation that a similar approach would be adopted at today’s meeting – that is, a surprise move would not have been considered without a likely plan to follow up with another.
However, we cannot overlook the facts that under the current arrangements the Board will feel obliged to provide an inflation outlook which sees underlying inflation return to the target band within the forecasting period. That period ends in June 2018 but will be extended to December 2018 at the August meeting.
Based on the information available in May we do not expect that there will be a sufficient change in that information in the June quarter inflation report to justify a forecast return to the band even with a six month extension to the forecast period without a further rate cut. That task will be further complicated if the recent rebound in the AUD is sustained.
Consequently we recognise that a prudent central bank dealing with record low interest rates will seek to retain maximum flexibility as shown today but do not believe that today’s lack of guidance precludes a second rate cut in August. However, we do accept that the August cut is likely to represent the bottom of the interest rate cycle.
Michael Workman, CBA
The conspicuous omission was some element of forward guidance. The last paragraph does not follow the pattern of 2015 where a clear easing bias was indicated after the first rate cut in February, ie in the March statement.
It appears that the RBA is prepared to “wait and see” how the inflation and wages data trends develop over the next few months before committing itself to another rate cut.
Holding the cash rate unchanged implies that the RBA does not see a significant downside risk to the activity data and upside to the unemployment rate in the short term. From the RBA’s perspective the economy does not currently need more monetary policy stimulus.
We still see another RBA rate cut as more likely than not because of the low inflation and wages trends. The next inflation update in late July means that, in our view, the August RBA Board meeting is the likely date for a rate cut.
Felicity Emmett, ANZ
The lack of a clear easing bias was the big surprise in today’s statement. The large downgrade to inflation in the May Statement on Monetary Policy suggested to us that more than 25bp of easing was required to keep real interest rates low, where the RBA’s forecasts also hinged on a further easing. Moreover, the Bank rarely cuts rates only once.
The lack of an explicit easing bias makes an August rate cut a much closer call than we had previously thought. That said, we continue to expect a further cut given the size of the downgrade to the Bank’s inflation forecasts and the fact that the mid-point inflation forecast remains at or below the lower bound of the 2-3% target band for the entire forecast period.
Ivan Colhoun, NAB
The big sleeper in today’s statement was arguably the more upbeat assessment of growth, with many parts of domestic demand at or above trend, and growth overall continuing, despite the big fall in mining investment. It has been some time since the Bank made such an assessment.
More surprising to many was the lack of a clear easing bias in the final paragraph of the governor’s statement. In fact, this section suggests the current stance of policy is consistent with both sustainable growth and inflation returning to target over time ie. a further easing is not required to secure the return of inflation to target. This should see the market less confident of an easing in August, though the Q2 CPI will likely still be important and another very low CPI, could still see a further rate cut.
NAB maintains its forecast of unchanged interest rates in the immediate future. Today’s Statement suggests the RBA’s May easing is currently seen as sufficient to return inflation to target and as such call into question an August rate cut.
The very aggressive 1.00-1.25% forecasts by some seem unlikely based on NAB’s forecasts. Such forecasts would require a more significant weakening of the Australian economy.
Scott Haslem, UBS
Today’s RBA Statement was less dovish than expected. Critically, there was no ‘scope to ease’ were inflation to remain low ahead, their commentary was a little more upbeat on growth and jobs, while they noted house prices had begun rising again. In short, according to the board, “holding … policy unchanged at this meeting … [is] consistent with sustainable growth… and inflation returning to the target over time”
For now, that’s a relatively neutral position, and it reads like they’re done. Of course, this ‘less dovish’ rhetoric is a response to recent stronger activity and housing data. Yet the AUD likely remains a ‘complication’, and we’d argue low inflation will remain a challenge ahead. So while the RBA has entered a ‘wait & see’ mode, we continue to forecast a final 25bp cut in August post a low Q2 CPI print. But like the RBA’s less dovish Minutes and the recent firmer data flow, today’s commentary raises the risk the RBA may be having second thoughts about the path of the cash rate, and presents a challenge to those looking for the RBA to cut the cash rate to 1.0%.
Shane Oliver, AMP Capital Markets
The statement accompanying the RBA’s decision to leave interest rates on hold was fairly neutral in terms of signalling any guidance regarding the direction of interest rates going forward, really just being a description of recent developments. However, it does make reference to “event risks” (presumably a reference to the upcoming Fed meeting, the Brexit vote and Australia’s election), continues to see inflation remaining low for some time, repeats the concern that an appreciating Australian dollar could complicate economic adjustments in the economy and doesn’t seem to be too concerned about the recent rise in home prices. The RBA’s final sentence suggests that the fact that it just eased in May was a factor in its decision to leave rates unchanged “at this meeting”.
Despite the absence of any clear easing bias, we remain of the view that the RBA will cut rates again later this year. The risks to inflation are on the downside to the RBA’s already below target inflation forecasts thanks to underlying deflationary pressures globally and record low wages growth domestically. What’s more continuing delays to Fed tightening threaten to keep the Australian dollar elevated which would be bad for both growth and the desire to boost inflation. In fact the $A looks to be on the way back up again reflecting Fed delays and the RBA’s lack of a clear easing bias.
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