As expected, the Reserve Bank of Australia left the cash rate on hold at 1.75% yesterday and Governor Glenn Stevens again hinted at cuts ahead if inflation remains low.
We will know what inflation is by the time of the August meeting with the June quarter CPI out on July 27 (the week before).
Although downplaying the global impact of Britain’s shock Brexit vote on June 23, Mr Stevens concluded his statement saying that “further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.
The language differs markedly from that of the June meeting, when the RBA also left the cash rate unchanged. Mr Stevens statement ended with this statement:
“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”
The difference is quite noticeable, but speeches in the past have ended in a similar fashion.
On Brexit, Mr Stevens said in the statement "Financial markets have been volatile recently as investors have re-priced assets after the UK referendum. But most markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative.
“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern,” he said.
The market and most economists see an August reduction to 1.5% and a cut by November is now seen as a ‘given’ by market economists and bankers.
Most economists expect the June-quarter CPI to come in below the RBA’s 2% to 3% target range. This, coupled with the fallout from Brexit and further US Federal Reserve hesitancy on rate increases, will be enough to force a cash rate cut to 1.5% in August.
Mr Stevens said inflation had been “quite low” and “Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” he said in yesterday’s statement.
A cut by the November board meeting is now fully priced in by investors.
After spiking to US75.40¢, the Aussie dollar slipped back to around pre-statement levels of 75.10 US cents. The stockmarket sold off well before the announcement, which didn’t add any help to what was a weak day for equities. Investors are looking for help from the resumption of trade in the US overnight after the holiday Monday.
The assessment of the Australian economy from Standard & Poor’s will be out on July 24 and that and the final shape of Federal parliament will also be on the agenda of the August RBA meeting.
The AMP’s chief economist, Dr Shane Oliver said in a note late yesterday “We remain of the view that the RBA will cut rates again later this year.“
“The risks to inflation are on the downside thanks to underlying deflationary pressures globally and record low wages growth domestically; the risks to global and Australian growth are still on the downside (with Brexit and the messy Australian election not helping); and the $A is still too high and at risk of further appreciation given the Fed’s endless delays in raising rates again.
“As such we are continuing to allow for two more 0.25% rate cuts this year, the first in August just after June quarter inflation data is released and when it next reviews its economic forecasts,” Dr Oliver wrote yesterday.
