The Reserve Bank of Australia (RBA) did something it hadn’t done since 2012 and cut rates twice in successive meetings. The market reaction was limited given the high level of communication running into the July meeting. However, whether the rate cut came in July or in August, the cash rate was always going to 1% as the RBA had told us as much. RBA Governor Philip Lowe had been very clear in letting the market know that the projections for the economy it set out back in May were based on a 1% cash rate.
WITH TWO RATE CUTS DONE AND DUSTED, THE QUESTION IS WHAT NEXT?
More easing is likely but the commitment behind that easing is not as strong. The final paragraph from the RBA’s statement was largely unchanged from last month shy of two words “if needed”. The same emphasis was placed on achieving the inflation target and the capacity for the unemployment rate to fall, but the introduction of these two words provides the RBA some flexibility on the timing of the next move and being able to assess the impact of the 50bps decline on rates on the domestic economy as well as the developments internationally.
There are tentative signs of stabilisation in the housing market and household spending is expected to pick up thanks to individual tax reforms that should shortly pass through the senate. But with a very weak first quarter growth figure (1.8% y/y), the economy will have to pick its socks up to deliver on the “around trend” growth the RBA expects and the 2.75% forecast in May’s Statement on Monetary Policy (SoMP).
The RBA clearly didn’t take too many positives away from the G20 meeting, given their downgraded assessment of the global outlook from last month’s statement. They may be hoping for some better signals in the domestic economy, as global politics remains the wild card. Sentiment indicators for global manufacturing have been in contractionary territory and trade is clearly having an impact. To the extent this may be a signal of broader economic momentum slowing beyond the trade uncertainty, the potential for a retrenchment in corporate spending or worse—hiring—would be difficult to offset in the domestic economy.
When it comes to monetary policy, the conversation has changed. It’s no longer a question of if, or when, but rather how far the RBA will go. Further cuts are still expected given the economic growth is unlikely to be strong enough to sustain an increaseinemployment growth, a fall in the unemployment rate or drive inflation back towards the RBA’s target. The August SoMP will give the RBA another opportunity to set market expectations for the path of rates over the rest of the year and into 2020, currently they are sticking to their central scenario and if that continues, further rate cuts will be pushed out until year end.
Right now the market is reacting to the easing favourably, but in as much as it signals weakness in the economy, further cutsmay not elicit the same reaction.