The RBA's May rate cut was a closer call than everyone thought

A balloon wrangler at the Quick Chek festival in Readington, New Jersey, in 2008. (Photo by Jeff Zelevansky/Getty Images)

The RBA has just released the minutes of this month’s board meeting at which time it decided to cut rates by 25 basis points to a modern day low of 1.75%.

Traders were waiting in anticipation of what many believed were the most important minutes in years. That’s because while the cut caught around 50% of market forecasters by surprise the big reduction in inflation forecasts in the RBA’s quarterly Statement on Monetary Policy blindsided everyone and has triggered an unprecedented race by economists and forecasters to call a lower likely terminal cash rate from the RBA in this cycle.

While the minutes mention inflation 20 times and note that the outlook for inflation has fallen, the fact that the closing paragraph of the minutes said “members discussed the merits of adjusting policy at this meeting or awaiting further information before acting” suggests that the RBA board at this time is not as dovish as the market has been reading it since the releases of the Statement on Monetary Policy.

The Australian dollar has risen a quarter of a cent as a result and is sitting at 0.7322 at present.

What’s driving that AUDUSD rally and what could continue to support the currency and impact the outlook for rate cuts in Australia is that the RBA board directly addressed the apparent contradiction in the SoMP which downgraded the inflation outlook but kept the growth outlook positive.

The minutes reflect “in coming to their policy decision, members noted that developments over recent months had not led to a material change in the outlook for economic activity or the unemployment rate, but the outlook for inflation had been revised lower”.

That suggests the RBA knew it had little lose – in terms of a destabilising acceleration in inflation – by cutting rates and as a result took out insurance for the economy against global forces of deflation by deciding to take the risk of let the economy run a little hotter in the current environment.

That reinforces the cut is about forestalling the chance of global deflationary forces taking hold in Australia more than it is about growth.

That will inform the market, and economists, views on the possibility of another rate cut in the months ahead.

As it stands at the moment the minutes don’t rule out another rate cut at the August board meeting after the next CPI has been received. But as market pricing now suggests another cut is far from a fait accompli.

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