Since the RBA released its statement on monetary policy yesterday, the consensus view is that, compared to previous statements, the tone was far more neutral.
The softening of tone towards the level of the Australian dollar, something that saw the currency surge higher in response, along with a slightly more optimistic view on the pace of labour market hiring, has seen many suggest, the RBA is moving further away from cutting rates.
Morgan Stanley, in a note released after the August statement, are in agreeance, saying the “RBA lifted the hurdle to further cuts”.
Here’s Daniel Blake, Chris Nicol, Antony Conte and Steven Ye – the bank’s Australian economics team – on why their call for a further 0.25% rate cut in November is now more dependent on a slowdown in the housing market.
While the statement was less dovish on the currency, we retain our view that another rate cut will be necessary to support GDP growth over FY16, where at 2.3% we sit well below the RBA’s last-published growth forecast of 2.9% (with updates to be released on Friday). In particular, we are closely monitoring the effect of macro-prudential tightening and investor mortgage repricing on housing activity. These measures can make space for further RBA easing (particularly to again guide the AUD lower after today’s reaction), whilst also increasing the chance of an even weaker scenario where multiple rate cuts are needed to prevent any over-correction in the housing market.
In their opinion “non-mining investment is the the most important barometer for measuring Australia’s transition”, which they believe is arguably a better offset to the mining drag than dwelling investment, given its sustainability and impact on competitiveness.
At this point they do not see any evidence that non-mining business investment is improving with capital expenditure intentions falling while growth in business lending slows.
Like economists, markets remain split on whether the RBA will deliver a further rate cut this year. According to Australian cash rate futures, a 0.25% cut in November is currently priced at 40%.
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