If you expect that the Reserve Bank of Australia will insert an explicit easing bias into its July monetary policy statement later today, indicating that another rate cut is likely in the period ahead, be prepared to be disappointed. There’s only a slim chance that will be delivered, setting up a “disappointment trade” given widespread expectations that another rate cut is coming, perhaps as soon as August.
That’s the view of Prashant Newnaha, TD Securities Singapore-based rates strategist, who believes that the RBA is unlikely to display any real urgency to cut rates.
“The RBA’s measured approach to policy suggests the Bank is less likely to re-introduce an explicit easing bias,” says Newnaha. “Rather the Bank is more likely to nod to offshore risks and display no real urgency to cut rates as per the May and June minutes. Any reference to the Federal election held on Saturday is unlikely to appear.”
“This sets the market up for a ‘disappointment trade’ today given nearly the entire analyst community expects the RBA to cut at its August meeting,” he says.
The nifty flowchart found below, supplied by TD Securities, communicates the likelihood of various scenarios eventuating at the RBA’s July policy meeting, according to Newnaha.
He attaches a 95% probability that rates will be left at 1.75%, mirroring sentiment from both economists and markets. Should that eventuate, he believes there’s a 75% chance that the board will adopt a “wait and see” on rates, avoiding the temptation to insert an explicit easing bias on this occasion.
Looking beyond the July meeting, Newnaha — like the vast majority of economists — believes that the RBA will still cut rates in August following the release of Australia’s June quarter CPI report on July 27.
“TD pencils in Q2 underlying CPI to come in at 1.3%/yr following another weak print for the June MI Inflation gauge,” he says. “Accordingly TD forecasts the RBA to cut the cash rate to 1.50% at its August meeting.”
The RBA wouldn’t be cutting rates if not for the weak outlook for inflation, in other words, mirroring sentiment expressed by other economic commentators ahead of the inflation release.