RBA retains easing bias and will act on it with August cash rate cut: economists

The RBA is likely to leave the cash rate on hold in July but economists are pencilling in a likely 25 basis point rate cut in August provided there is a benign second quarter inflation reading on July 24 and no sign of a significant pick-up in non-mining sectors of the economy. 

Westpac chief economist Bill Evans believes the end game for the RBA in the current easing cycle remains a 2% cash rate with the most likely timing being a 25 basis point rate cut in August followed by another one in the final quarter the year and one in the first quarter of 2013. 

“The Reserve Bank has retained an easing bias, but it is not an urgent one, says Evans, the first major bank economist to correctly tip the RBA to begin its easing cycle in November 2011.

“The path of easing from here will depend on developments in demand; the financial markets (the Australian dollar, as it jointly impacts demand and inflation) and the inflation story itself,” writes Evans in a note following yesterday’s RBA decision. 

Evans says a key piece of information the RBA will assess is the second quarter ABS inflation figure, which will be released on July 24 - between the July 2 and August 6 monetary policy meetings. 

“We have a more downbeat view on global growth next year and our domestic forecasts are also lower than the Bank's. 

“As such we already see a strong case for further monetary policy easing. 

“However, the tone of yesterday's statement implies that the RBA Board is looking for further evidence before acting again, which points to rates being kept on hold in July. 

“However, it is likely to signal at that meeting that the forthcoming inflation print could provide scope for it to support demand further within the context of its target [inflation band of between 2% and 3%],” he says. 

AMP Capital chief economist Shane Oliver, one of just a few economists who expected a cash rate cut yesterday, said the key message from yesterday’s accompanying statement from Glenn Stevens was that interest rates were appropriate for the "time being", but “importantly it also signalled that it retains a bias to cut interest rates again if needed”. 

“Our view remains that the RBA will have to act again on its easing bias,” says Oliver. 

“While the Australian dollar has fallen over the last month at around $US0.97 it hasn't really fallen enough to provide a big stimulus to the economy (it’s just at the low end of the range it’s been in for two years). 

“While the economy has shown tentative signs of responding to lower interest rates, its now crunch time for the Australian economy with peaking mining investment leading to a heightened sense of urgency that other parts of the economy start to pick up more vigorously,” Oliver says. 

“Ultimately this will occur, but its likely to require a lower Australian dollar and a further decline in interest rates to ensure the adjustment back to a more balanced economy is not too painful. 

“As a result we continue to see further interest rates cuts from the RBA, with the next move likely in the next month or so, although the RBA may decide to wait until the August meeting after which it will get a look at the June quarter inflation figures,” he says. 

CommSec chief economist Craig James highlights that the accompanying statement by Glenn Stevens was probably the smallest on record at 348 words. 

“Basically the Reserve Bank believes it has cut rates low enough to boost economic growth,” James says. 

“But if the economy continues to lag and inflation stays low, the Reserve Bank has vowed to cut rates further. 

James highlights the performance of the Australian dollar as one of the key uncertainties in the minds of the RBA. 

“While the Aussie dollar has fallen over the past month, we are still in the dark about the Reserve Bank’s 'comfort level', given the myriad of factors such as commodity prices, the trade accounts, our AAA credit rating and interest rate settings,” he says. 

He also says the RBA will look at the cash rate in relation to variable mortgage rates and how close they are to “normal”. 

“Currently the variable housing rates of major banks are around 6.20%, below the long-term average or “normal” rate of 7.20% but still modestly above the 41-year low of 5.75% recorded in April-May 2009,” says James. 

“Certainly there is more activity in the housing market at present, but the response has been more by investors rather than owner-occupiers. 

“Not only do analysts need to consider the environment, but also the different reaction funds of demographic groups, from Generation Y to baby boomers,” he says. 

James returned to the wording of the May monetary policy decision statement where the RBA said that only “some” of the scope to ease policy had been used, keeping some in reserve. 

“The Reserve Bank has kept the easing bias firmly in place. So we continue to pencil in the risk of another rate cut in August after the inflation data released in late July,” he says.