After months of speculation, the Reserve Bank of Australia cut interest rates at its August monetary policy meeting, taking the official cash rate to 1.50%, the lowest level on record.
It was a decision that was widely expected by economists and financial markets.
Now, with rates already at a record-low, again, many are now asking what comes next?
Financial markets have wasted no time in speculating that there’ll be another 25 basis point cut, taking the cash rate to just 1.25%, pricing in a 50/50 chance of another cut in November. It will be Philip Lowe’s second meeting as RBA governor.
This Friday’s quarterly statement on monetary policy, released by the RBA, will be closely scrutinised to see whether such an outcome is likely.
While financial markets are sitting on the fence, it’s time to see what the economic community thinks will occur. Is the latest reduction the bottom of the interest rate cycle, or are there further cuts to come?
Here are just a few of the economic notes that have hit out inbox this afternoon, starting with Bill Evans of Westpac.
Bill Evans, Westpac
Our current view is that a further cut in November is not likely. With interest rates very close to their effective floor we expect that the Bank will be very patient in gathering information around the likely growth and inflation outlook. From our perspective the near term prospects for the real economy appear to be encouraging with lead indicators for the labour market improving and the lift from housing construction and services exports being sustained.
For us the real issue will be the environment in 2017 when the housing cycle will be in reverse; jobs growth may have cooled; global growth, particularly in this region, will have slowed further; and Australia’s interest rates may still be attractive to international investors. It is likely that any change in our current forecast that rates have bottomed will have been motivated by clearer prospects of those developments. We expect that the RBA will be similarly cautious with their assessment.
It is a little early to draw those conclusions given the unusually high degree of uncertainty, particularly around the global environment, but suffice to say that the risks to the rate outlook, particularly in 2017, are firmly to the downside.
Michael Workman, CBA
With headline and underlying inflation well below target there was room to cut the cash rate. It’s not really about the activity data. It’s about the lack of wages and inflationary pressures. We can try and force a higher growth rate because the inflation risks are not to the upside, but to the downside.
The last paragraph in today’s statement is identical to the May one. Upcoming rate changes are dependent on the flow of activity, inflation and wages data.
We still expect another RBA rate cut at the November meeting after the next inflation update in late October. After today’s RBA announcement, the markets are pricing in a 50% chance of a November rate cut and a 60% chance of another cut by May 2017.
Kieran Davies, ANZ
Our central case is unchanged and we see rates on hold at this point at 1.5%, albeit with a clear risk of further easing given we think that the RBA’s forecast outlook of persistently low inflation is consistent with an easing bias. We think that the RBA will now pause to assess the impact of the May and August cuts, with a judgment on the need for further easing depending on the next CPI (due 26 October), as well as the state of the labour market and housing market.
The currency will also be an input into the decision given the RBA again warned that a rising exchange rate could complicate the recovery. The extent of the pass-through of the cash rate to lending rates also matters as the RBA ultimately sets policy with reference to the rates faced by borrowers. On that front, one major lender has already announced that it will pass on only 13bp of today’s cut to its variable rate home loan customers.
Near term, we see a risk that Governor Stevens may push back against expectations for further easing when he speaks in Sydney on 10 August, perhaps by again mentioning that there are limits to monetary policy, particularly when the cash rate is nearing the 1% floor previously cited by Governor-designate Lowe.
Scott Haslem, UBS
The RBA’s May SOMP forecasts showed GDP growth around 3%, but inflation only reaching the bottom of the 2-3% target band by mid-17. These forecasts were based on a ‘rough’ (technical assumption) of an additional cash rate cut to 1.5%. With Q2 CPI in-line with those forecasts, the RBA has now followed through with that cut.
While the growth data continue to signal a firm economy that’s rebalancing well (away from mining, back to domestic growth), the further slowdown in local wage growth & non-traded inflation, and a higher AUD since May, along with recent news on slower US growth and weaker oil prices, have all likely heightened the RBA’s risk they may not reach their mid-17 inflation forecast of 2%.
While this has fostered an additional cut today, we believe already accommodative policy, firm growth data, a likely trend lower in the AUD and concern about financial stability will see the RBA on-hold at 1.5% for the foreseeable future. We expect Friday’s SoMP forecasts to remain unchanged.
Shane Oliver, AMP Capital
The latest rate cut is all about adding to confidence that inflation will head back to the 2-3% target zone within a reasonable time and to help maintain downwards pressure on the value of the $A in the face of ongoing delays in Fed rate hikes.
In terms of inflation the RBA is trying to prevent a further fall in inflation expectations that could push wages growth to new record lows and make it even harder to get inflation back to target. The longer inflation remains low and below target the greater the risk that it will become entrenched as we have seen in several other developed countries in recent years.
Will there be another cut? As always after a move the RBA’s guidance doesn’t give much away and often leads many to conclude that it has reverted to a neutral bias on future rate moves. However, we are allowing for one more rate cut in November based on our expectation that the September quarter inflation data (due in late October) will remain much lower than desired and that upwards pressure on the $A will likely remain.
Ivan Colhoun, NAB
NAB had expected the Bank to be more accepting of a period of below-target inflation, given the sources of low inflation were generally not related to weakness in the Australian economy and while indicators indicated that economic activity in Australia remained quite reasonable. Today’s decision to ease in spite of these issues therefore suggests to us a greater risk of still further interest rate cuts as NAB expects inflation to remain below target for an extended period. Having eased in May and August, though, it would be normal for the Bank to wait for a period to see how the economy responds to these rate cuts before considering further stimulus.
With today’s cut, which was contrary to our expectations, NAB is forecasting the cash rate to remain unchanged at 1.5% for the foreseeable future. But we now flag the potential for further interest rate reductions in 2017, given the likelihood that Australian inflation is expected to remain very low for an extended period. Should the economic outlook fail to improve or deteriorate, the inflation outlook continues to provide scope for further rate cuts in Australia.
Paul Bloxham, HSBC Australia
Although growth is holding up well, inflation is too low. The RBA noted that ‘prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting’. The statement provided little forward guidance, beyond noting that inflation was expected to remain low for ‘some time’.
Later this week the RBA will publish its quarterly official statement, which will provide more detail on the motivation for today’s cut and set out a new set of forecasts. We expect the growth and inflation forecasts to be largely unchanged from May, with growth expected to a bit above trend over the forecast horizon and inflation expected to gradually lift back to target.
We expect the RBA to now spend the next few months noting that they are waiting to see the full effect of the 50bp of cuts that they have delivered this year. Looking further out, we see wages growth and local inflation gradually lifting, as the rebalancing act comes to its end (around mid-2017, in our view). We see the RBA on hold in coming quarters, rather than cutting further.
Jarrod Kerr, CBA senior interest rate strategist
The RBA cut the cash rate 25bps to 1.5%. The move was expected by most economists and market pundits, but not all traders. Market pricing prior to the decision had crept higher to 70% (from 65% yesterday). Those who didn’t see this one coming were obviously playing a different game!
The subdued domestic inflation outlook provides the RBA’s reason to stimulate. But a rise in bank funding costs, weak international inflation outlook, and the RBA’s growing comfort in lending practices all point to another rate cut in November. We forecast a move to 1.25% by year end. The risk is still towards 1.0% in 2017.
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