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Tuesday, 06 August 2013 07:09

RBA cuts rates to 2.50%

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bank-building-icon1Surprisingly moves to neutral bias.

As widely expected the Reserve Bank Board decided to lower the cash rate by 25bps to 2.50% at its August Board meeting.

For us by far the most significant aspect of the Governor's statement was the decision to move back to a neutral bias from the consistent easing bias that we have seen in recent statements.

It does not hold that a central bank should necessarily move to a neutral bias following a rate move. An easing bias was used in the May statement despite delivering a rate cut. The words used were: "The Board has previously noted that the inflation outlook would afford scope to ease further ... at today's meeting the Board decided to use some of that scope". That is a more dovish explanation for a rate cut than that used today "The Board judged that a further decline in the cash rate was appropriate".

We were expecting that the Bank would choose to maintain downward pressure on the AUD by repeating the rhetoric from the June and July statements which said: "The Board judged that the inflation outlook ... may provide some scope for further easing should that be required to support demand". In today's statement the key final sentence was: "The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time" – a clear neutral bias.

Other aspects of the statement were more encouraging from the perspective of our forecast which has been and remains for another cut in November. Firstly, the statement followed the structure in July by pointing out that although the Australian dollar has depreciated 10% since early April it remains at a high level. The only change in this statement was to revise that change up to 15%.

The other really important point was that despite the 15% fall in the currency the Governor repeated his confidence that inflation pressures are expected to remain under control. Comments on the real economy did not change from the July statement with growth being described as "a bit below trend" and the unemployment rate being recognised as edging higher.

The international outlook remains unchanged with global growth being described as "running a bit below average this year". A new observation is the linking of volatility in the global financial markets with a downturn in a number of emerging market economies. That link to emerging markets was not made in July.

Conclusion

In choosing not to maintain a clear easing bias it seems very unlikely that the September meeting will be 'in play'. Of course, with that meeting being timed for four days before the Federal election it would have been quite surprising to see any change in monetary policy so close to an election. We are not unnerved by today's approach because it in no way implies that rates have reached some form of institutional low and that should the economy evolve in the way we expect the Bank will cut rates again.

The calling of the election, by providing some political certainty by early September, might boost confidence measures but hard decisions showing up in the data to raise employment and investment seem a lot further off. We also agree with the Reserve Bank that the fall in the currency is most likely to impact importers' margins rather than consumer prices. A much stronger demand environment would be required for importers to confidently pass on price increases. We have not doubt that the Bank expects there is more work to be done. Note that the Government raised its unemployment forecast for 2013-14 from 5.75% to 6.25% and expects it to remain there over the course of the next year. We expect that the Reserve Bank feels the same way, although Friday's Statement on Monetary Policy will only include growth and inflation forecasts.We expect the Bank would therefore have no hesitation in cutting rates again once more information is available on inflation which will print in late October and the response of business/consumers to the election result has been clearly signalled.

We also believe that these dampening forces will be sustained through into early 2014 providing scope for another cut in February.

 

Written by Bill Evans

Chief Economist - Westpac Banking Corporation

Read 1074 times Last modified on Tuesday, 06 August 2013 07:09
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