HSBC expects one more rate cut following RBA June meeting, but Westpac says minutes suggest three more by December

HSBC chief economist Paul Bloxham and Westpac senior international economist Huw McKay have come to different conclusions about rate cut expectations for the remainder of 2012 following the release of the minutes from the June 1 RBA monetary policy meeting.

Bloxham expects just one more 25-basis-point rate cut this year, taking the cash rate to 3.25%, while McKay expects three more taking the cash rate to 2.75% by December.

“We think the RBA is probably a little ahead of the curve, having cut rates last month,” says Bloxham. 

“With global risks still tilted to the downside, we continue to expect that there may still be one more 25 basis points cut in the second half of 2012, but it is a close call,” he says. 

Bloxham says interest rate markets pricing in 90 basis points in cuts is “overdone”.

He notes the more “upbeat” nature of the minutes compared with the post-meeting statement.

“Today's minutes reiterated that the 25-basis-point cut in June was insurance against the possible effect of weakening global conditions, which was afforded because inflation is expected to remain low. In their view, local conditions had not significantly weakened. 

“They also told us that the RBA viewed the decision to cut rates on 5 June as 'finely balanced'. 

“We agree. As we noted before the meeting, our view was that local conditions did not warrant a further cut in interest rates. The minutes seem to suggest that on local conditions alone, they would probably have left rates steady. But the cut was in response to weakening global conditions.” 

McKay, however, says the best policy response from the RBA would be to reduce the cash rate by a further 75 basis points by the end of the year.

“The month-to-month path for the policy rate to achieve that end point is difficult to define precisely, with the fluid nature of the European picture making the potential timing more event-driven than is usual,” he says.

“We feel that the best policy response given the balance of domestic and international forces would be to deliver 25 basis points cuts at successive meetings in July and August, before a final move in the December quarter.”

McKay agreed with Bloxham that the June decision was a difficult one for the RBA board, which was ultimately swayed in favour of a rate cut by global concerns.

“The minutes to the board meeting of June 5, which resulted in a 25-basis-point cut in the policy rate to 3.5%, imply very strongly that a large cut was not countenanced, and that if the decision was being made solely on domestic grounds, a cut would not have been delivered,” McKay says.

“The rationale seems to have been that there were enough elements of resilience in the domestic figures for the bank to take some time to assess the impact of past easing on activity, but that with the potential for global tensions to ‘intensify’ precautionary behaviour, the ‘finely balanced’ arguments turned in favour of a cut.”