The Reserve Bank of Australia’s July rates decision surprised no one by leaving the official cash rate at a record-low level of 1.75%.
However, just because the decision was widely predicted, it was hardly a non-event. Far from it.
For one, the bank avoided inserting an explicit easing bias into the final paragraph of its statement, something that would have communicated to markets, businesses and households alike that another reduction in rates was likely.
“Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate,” the statement read.
Despite the omission of an easing bias, the bank made it clear that it was waiting for “further information” in order to “make any adjustment to the stance of policy that may be appropriate”.
When it comes to “further information”, it’s clear the board was referring to to updated consumer price inflation data from the Australian Bureau of Statistics, something that will arrive on July 27.
Given the tendency for the board to adjust interest rates following the release of this quarterly report, and its reaction to the last CPI report which prompted it to cut rates, markets are understandably chomping at the bit for this release.
As Chris Weston, IG Market’s chief market strategist, wrote following the release of today’s policy statement, “the absolute MacDaddy release will be the Q2 CPI print on 27 July.”
MacDaddy indeed. It’s clear that in the minds of many analysts, the only show in town this month will be the inflation report.
Now that the economists have had time to digest the July monetary policy statement, it’s time to see what they’ve made of it all. Has the absence of an easing bias swayed their collective view that a rate cut is likely, or merely reinforced the belief that another ultra-low figure will prompt further easing from the board.
We start with Paul Dales of Capital Economics, an economist who has been on the money when it has comes to the reintroduction of the RBA’s easing cycle.
Paul Dales, Capital Economics
By leaving interest rates at 1.75% and not providing a very strong hint that they will be cut in August, the Reserve Bank of Australia today implied that the recent financial market volatility and political uncertainty has not altered the economic outlook.
Even so, we think that the weak outlook for inflation will prompt the RBA to cut rates to 1.5% in August and eventually to 1.0% next year.
The Bank may be saying that if the CPI inflation data for the second quarter due for release on 27th July are weak, then it will cut rates to 1.5% in August. We have no argument with that and have been saying as much for some months now.
We doubt underlying inflation will rise next year as the RBA expects. So while interest rates may not fall below 1.5% for a while, we suspect that stubbornly low underlying inflation will be the main reason why rates will probably be reduced to 1.0% next year.
Matthew Hassan, Westpac
We continue to see the June quarter inflation report as the most critical piece of information. Given the RBA’s current forecasts – for inflation to still only be at the bottom of its 2-3% target band by the end of its forecast horizon under an assumption of ‘market pricing’ on rates that implied further policy easing near term – we see the onus as being on the inflation report to give the RBA a reason not to move in August. The Bank’s ‘base case’, in other words, is that the June quarter CPI confirms its current forecasts and the need for a further 25bp rate cut in August.
For the record, the RBA’s May forecasts included a June 2016 underlying inflation read of 1.5%yr, implying a June quarter rise of just under 0.5%qtr. Westpac’s preliminary estimates suggest the quarterly is likely to come in closer to 0.3%qtr with annual underlying inflation slowing to 1.3%yr, a new record low that would clearly seal the deal on an August move.
Beyond an August move we expect the Bank to become more reluctant to ease policy further, and to take a more ‘flexible’ view on its inflation target, for example by allowing itself more time to return inflation to the target range. That means an August cut will likely represent the bottom of the interest rate easing cycle.
Shane Oliver, AMP Capital
Changes to the closing paragraph in the RBA’s Statement have arguably softened its neutral bias and opened the door to another easing.
Specifically, the RBA’s newly inserted reference to “further information” over the period ahead that should allow it to refine its outlook and “make any adjustment to the stance of policy that may be appropriate” is likely a reference to the June quarter inflation data due later this month and possibly a broader reference to allowing time to be able to better assess the impact of Brexit and the Australian election and the risks to the Australian dollar.
Since a rate hike is most unlikely, the “adjustment” that the RBA is referring to is presumably another possible interest rate cut.
As such we are continuing to allow for two more 0.25% rate cuts this year, the first in August just after June quarter inflation data is released and when it next reviews its economic forecasts.
George Tharenou, UBS
As we expected, the RBA did not reinstate an ‘explicit easing bias’ – such as using the words ‘further easing may be appropriate to support demand’ or ‘time being’. However, as we flagged, the RBA still did take a clear shift in the dovish direction.
The RBA said “holding monetary policy steady would be prudent at this meeting”.
The addition of the word “prudent” is important. While it arguably has been used in various contexts, the most comparable to now was in April-2012 where the RBA “thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy”, and the RBA subsequently cut 50bp at the following meeting in May-2012.
Indeed, this month’s comment flagging “adjustment…may be appropriate” is also a dovish shift from June’s ‘near-neutral’ comment that “holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time”.
“The key message from today’s RBA Statement is that assuming the Q2-16 inflation outcome is ‘close enough’ to expectations, the RBA is flagging a rate cut. Hence, we still think the RBA is likely to cut the cash rate by a further 25bp to 1.50% at its next meeting in August.
Ivan Colhoun, NAB
Last month the Bank thought a 1.75% cash rate was consistent with both sustainable growth and inflation returning to target. With not much in the way of new Australian economic information – but likely a further delay in Fed tightening, the Bank is now looking to incoming data to refine its forecast for growth and inflation and to adjust policy as appropriate.
Today’s statement suggests the Bank may be more willing to consider a further rate cut in the near term than we had assumed. That said, how the data prints remains important, with a Q2 core CPI result below 0.4% q/q likely necessary for an August rate, while the outlook remains for reasonable growth with house prices rising again.
Michael Workman, CBA
Even though there was no forward guidance, we expect the RBA to cut the cash rate at its next meeting. Mainly because we believe that the June quarter Consumer Price Index (CPI) will be relatively low, and produce a similar reaction to the March quarter CPI. That is, a rate cut.
It may be a case of just keeping the real short term rates stable by cutting the nominal rates, because inflation stays lower than expected.
Felicity Emmett, ANZ
After omitting an explicit easing bias in the June post-meeting statement, the reintroduction of a soft easing bias in today’s media release suggests the August meeting is ‘live’. While activity and employment growth remains solid, inflation is weak and the rise in uncertainty both here and abroad suggests to us that further monetary policy easing is likely. We also think that the behaviour of the AUD will be important.
An August rate cut remains a close call. We think that low inflation and increased uncertainty will be enough to justify a rate cut.
Annette Beacher, TD Securities
Despite no explicit easing bias today we maintain our call for an August RBA cut to 1.5%.
Another downside miss for June quarter underlying inflation is a real possibility for July 27. While the RBA expected more of the same inflation at 1.5%/yr, our forecast is for a -0.25%pt downside miss to 1.3%/yr. In our view, this is a clear trigger for a cut to 1.5% in August, as real interest rates jump.
While technically the RBA is back to data-watching, we see a surprise in the Q2 CPI report as the only potential trigger for RBA action next month.
Paul Bloxham, HSBC
Keep calm and carry on. This was the RBA’s approach today, despite political uncertainty at home and abroad.
They pointed to ‘further information’ as being needed to assess if any adjustment to policy may be needed. The Q2 CPI print, due on 27 July, is clearly in focus.
If the Q2 print shows underlying inflation below the bottom edge of the 2-3% target band on a quarterly basis, that is, below 0.5%, we see the RBA as likely to cut in August
Our central case is for a low Q2 underlying inflation print to motivate a 25bp cash rate cut in August to 1.50%. Much hangs on that CPI number.