RBA to leave cash rate on hold next week with one more cut likely this year: HSBC’s Paul Bloxham

The Reserve Bank is “ahead of the curve” on its cash rate setting and is set to leave the rate unchanged at 3.5% at its July meeting on Tuesday, says HSBC Australia chief economist Paul Bloxham.

He says the rate cut in June was insurance taken out against the risk of global conditions worsening further.

“As such, it seems highly unlikely the RBA will cut again next week.

“As it has already accounted for some of the downside risk to global growth, it also suggests there may be fewer rate cuts to come than there might otherwise have been," Bloxham says.

Bloxham expects one more rate cut in the second half of the year due to “global risks” playing out, but thinks a further 80 basis points of cuts being priced by interest rate markets  by the end of the year is overdone.

Bloxham says that the in the days following the June 25 basis point rate cut, “it became apparent that momentum in the local economy was stronger than had generally been expected.

“GDP growth was strong in the first quarter (4.3% year-on-year), as was employment in May (up 39,000 jobs).”

He also highlighted the RBA’s monetary policy statement released two weeks after the June decision, which said it was a “finely balanced” call.

“It is clear to us that the RBA’s last cut was global risk insurance, not a response to local conditions.

“But insurance is not free. By cutting rates further the RBA takes the risk that inflation could pick up more. This risk was clearly weighed against the risk that global conditions worsen further, thereby weakening the local economy.

“In the RBA’s view, it seems that the ‘path of least regret’ was to cut rates in the face of global risks."

Bloxham says the RBA was in the position to cut rates at its June meeting due to inflation being currently low at an underlying rate of 2.2%

He expects inflation will rise in the second half of 2012 – but only marginally – due to the carbon tax .

The carbon tax is forecast to boost headline inflation in the third quarter by around 0.7  percentage points and underlying inflation by around 0.2 percentage points.

"The RBA will look through the impact of the carbon tax on inflation. It is already publishing inflationforecasts that exclude the impact," says Bloxham.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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