Financial markets continue to bet another rate cut in Australia won’t be far away.
As Sean Callow, senior currency strategist at Westpac, noted earlier this month, rate cuts in Australia are like cockroaches – when you see one there’s likely to be others.
The RBA went in May, following up that move with a series of downgrades to its inflation forecasts, further fanning expectations.
With many questioning when, not whether, the RBA will cut rates again, it may be worthwhile looking at the past to determine what may happen in the future.
That’s exactly what Prashant Newnaha, TD Securities’ Asia-Pacific macro strategist has done, supplying this effective yet simple chart showing how frequently the RBA follows up one rate cut with another over the past 26 years.
Based on historic patterns, the RBA has a tendency to go back-to-back, or waiting a month before cutting again.
Does that mean we’ll see a rate cut in June? No, says Newnaha, suggesting the decision to cut rates by only 25 basis points in May, not 50, indicates a lack of urgency from the RBA to ease policy quickly, despite its downgraded inflation forecasts.
Given the topic of urgency or lack there of, we have looked at how long the RBA has historically waited to deliver follow up cuts, based on easing cycles since Sep[tember] 1990. The RBA has usually wasted little time in subsequently cutting the cash rate, in the majority of cases waiting 1 or 2 months to deliver the next cut.
That said recent RBA activity shows the Bank is prepared to wait longer than the 1 or 2 months to deliver a follow up cut. We have only two occasions where the Bank waited 3 months for a follow up cut and they were recent – beginning with the May 2013 cut followed by the Aug 2013 cut and the Feb 2015 cut that was followed by a May 2015 cut.
The mystical months of February, May and August, along with November, have a higher tendency for rate movements given they fall between the release of Australia’s quarterly CPI report and the RBA’s quarterly statement on monetary policy just nine days later.
Indeed, of the 29 rate movements made during Glenn Stevens’ tenure as RBA governor, 16 have occurred in those months.
The RBA are an inflation-targeting central bank, and it clearly likes to see the quarterly inflation report before moving interest rates.
Because of this, Newnaha, like the majority of economists and rates traders, thinks the RBA will wait until it receives the June quarter CPI report on July 27 before cutting rates again on August 2.
“Barring an extreme risk-off event, August is lining up as the earliest the RBA could cut rates,” he says.
“Indeed with little change to the bank’s other forecasts to growth and unemployment, it does support the RBA ‘awaiting further information’ in the form of Q2 CPI on 27 July before acting.
“TD’s official forecast and consensus is for the RBA to cut in August.”
Thus 22 of 24 economists polled by Bloomberg see the RBA cutting rates to 1.50% in August. Cash rate futures also favour a move at this meeting, attaching a 68% probability that a cut will be delivered.