*The RBA cut official interest rates to the historic low of 2% today. As in February, the decision to cut rates came just after another relatively benign quarterly inflation report, and just before its next Quarterly Statement on Monetary Policy (due Friday) – which is likely to downgrade the economic growth outlook further. Will the RBA cut again?
*As I feared, however, markets have reacted cautiously to the RBA’s decision. The major reason is because the accompanying statement dropped the suggestion of recent months that “further easing may be appropriate over the period ahead..”
*To my mind, however, this change in language does not necessarily signal a change in policy bias. Indeed, the RBA did not use this language in February, even though it cut rates that month and still likely retained a strong bias to ease further. Instead, this language was introduced in March.
*What’s more, the RBA made similar changes to its language after each of the two previous interest rate cuts in May and August 2013. Similar easing bias language – “the inflation outlook would afford scope to ease further, should that be necessary” – was used in February, March and April 2013, before being dropped in May when rates were cut to 2.75%. This language was reinstated in June and July 2013, and removed when rates were cut in August of that year to 2.5%.
*If 2013 is any guide, this suggests the RBA is not now contemplating another cut next month, or even in July. That said, if the RBA is required to revise down its economic growth forecasts again in the August Statement of Monetary Policy (SMP), and the $A remains uncomfortably high, it may well feel obligated to cut again – repeat the pattern of quarterly interest rate cuts already evident this year.
*By this time, moreover, there may be greater signs of cooling in the Sydney property mania, especially as house prices to income in NSW are now very high.
*To my mind, the chance of a rate cut in August remains relatively high, especially if the RBA growth outlook for 2016 in this Friday’s SMP is still north of 3%. Due to ongoing weakness in both mining and non-mining business investment, and restrictive fiscal policy, chances are growth in 2016 will be below rather than above 3%.
*Our call remains that the official cash rate will end the year at 1.5%, with the $A eventually tumbling to US68c.