Earlier this afternoon the RBA left interest rates on hold at 2.0% following its November policy meeting. On balance, the statement strikes a slightly more optimistic tone than that seen in October, although the board has left the door open to further interest rate cuts by inserting an easing bias in crucial the final paragraph of its monetary policy statement.
Will the RBA act upon this easing bias and reduce rates further in the months ahead, or has its easing cycle come to an end?
In exceptionally quick time, particularly given the Melbourne Cup was run and won in the minutes following the decision, Australia’s economists have had their say.
Here’s a collection of the views received so far this afternoon.
Bill Evans, chief economist at Westpac:
Markets continue to price 100% probability of a rate cut by February. That is a much more realistic assessment given more time will be available to assess growth momentum and most importantly the December quarter inflation report. It is our view and, apparently, the view of the RBA that the next report will see core inflation move back to the normal “trend” number of around 0.6%. In that event our assessment of the likely growth momentum in the economy will point to rates remaining on hold in February and thereafter.
Any change in that view will be largely driven by an assessment that growth prospects in the economy are likely to lose significant momentum through 2016.”
Michael Workman, senior economist at the CBA:
In our view the next few RBA meetings are ‘live’. The RBA minutes, published on November 17th, are likely to indicate that a rate cut was discussed at today’s meeting. So, each of the major economic releases will be framed against whether it supports or detracts from the chances of an RBA rate cut in December.
For those looking to history as a guide, the June and July 2013 meetings deployed similar phrasing around “inflation may afford scope for further easing”. An RBA rate cut, from 2.75% to 2.50%, followed in August 2013. That followed the May 2013 cut from 3.0% to 2.75%. Although the economic backdrop was quite different at that time.
Another important point to note is that rate cuts come in 0.25% moves but rarely alone. We would expect two if they were to come in the first half of 2016. But, in our view, it requires a clear deterioration in the labour market forward indicators. We are not at that stage yet. The RBA’s analysis of the jobs market outlook will be in Friday’s SMP.
Ivan Colhoun, chief markets economist at the NAB:
NAB reads today’s Board Statement positively, with the Bank noting a moderate improvement in business conditions and employment and the prospects for further improvement having firmed a little over recent months. While noting that inflation provides the scope for further easing, that scope would require either deterioration in the outlook or evidence that the improving outlook remained of insufficient pace to reduce unemployment. Both of these assessments will likely take at least some months to emerge short of a major development in offshore economies. NAB continues to see the RBA on hold at 2% for an extended period, albeit with a mild bias to ease. The track of the economy will determine whether the Bank will ultimately ease further, but for now, this seems unlikely.
Felicity Emmett, co-head of Australian economics at ANZ:
“Overall, today’s statement highlights the importance of inflation to the Bank. That is, despite the prospect of some improvement in activity the Bank seems prepared to ease monetary policy on the back of a lower inflation outlook. This then suggests that a move in December is unlikely. The RBA seems more likely to wait until February when it will have another inflation number which will likely confirm the lower than previously anticipated inflation trajectory. Then the Bank is likely to deliver the first of at least two cuts next year in our view.
While today’s statement suggested a better outlook for activity, we are not so sure. Our own view is that next year growth is likely to remain challenged as the boost from housing starts to fade, and the support to trade from the lower AUD lessens. While the upward trend in consumer confidence coming on the back of Malcolm Turnbull’s appointment as Prime Minister is encouraging, it’s difficult to see that it will be translated into sustained strength in spending in the medium-term given the prospect of ongoing soft wages growth amid high levels of household debt. And any rise in the unemployment rate from its current elevated rate would be unpalatable for the RBA. So some further stimulus will be necessary, even if the impact is primary felt via a lower currency.”
Scott Haslem, George Tharenou and Jim Xu, economists at UBS:
We continue to view the Australian economy as rebalancing better than widely appreciated, and have argued strongly the economy does not need further monetary stimulus. However, that’s very different from arguing the economy needs a rate hike, as largely delivered by the recent lift in lending rates. Additionally, renewed global easing has the potential to shift the AUD unhelpfully higher. This suggests the case for the RBA to “support…demand” may still arise over coming months. We continue to look for a final, regulatory driven, rate cut to 1.75%, in the months ahead, likely Feb-16, post the next CPI print, and AUD response to upcoming US, ECB & BoJ policy moves.
Shane Oliver, head of investment strategy and chief economist at AMP Capital:
Despite jumping the gun on a November rate cut I still see the RBA cutting the official cash rate to 1.75% in the next few months, either in December or if not then in February next year. In fact the RBA has now moved to an easing bias in stating that it’s now lower than earlier expected “outlook for inflation may afford scope for further easing of policy, should that be appropriate..”
We expect the RBA to act on its easing bias in the months ahead as: big bank mortgage rate hikes are likely to weigh on retail sales in the run-up to Christmas; the non-mining investment outlook remains poor; peaking building approvals point to a peak in the contribution to growth from home construction next year; El Nino related drought risks are posing an additional threat to growth; the terms of trade is still sliding; the $A risks a rebound if the Fed continues to delay a move to higher interest rates and if other global central banks continue to ramp up monetary easing; and inflation is likely to remain below target. The cooling Sydney and Melbourne property markets are also removing what was once an impediment to further monetary easing.
Attention now will turn to RBA governor Glenn Stevens who is scheduled to address the Melbourne Institute 2015 Economic and Social Outlook Conference in Melbourne on Thursday at 9.25am AEDT. Beyond that keynote address, markets will also receive updated economic forecasts from the RBA when the bank releases its quarterly statement on monetary policy at 11.30am AEDT on Friday.
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