Will the RBA keep interest rates on hold? Pete Wargent

Just got around to reading the latest missive from one of my favourite blogs, Ricardian Ambivalence.

The blog explains why futures markets have all but discounted an interest rate cut in September (only a 7% chance is presently priced in) and don't expect to see any cuts for a few months, implying perhaps on balance not even until early next year.

The RBA's Minutes from its Monetary Policy stated:

"...with growth expected to remain below trend for longer and inflation to remain within the target even with the effects of a lower exchange rate, members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target.

Regarding the communication of this decision, members agreed that the Bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further. The Board would continue to examine the data over the months ahead to judge whether monetary policy was appropriately configured."

As Ricardian Ambivalence points out, while the next move for interest rates could be down, there is no urgent rush for the trigger to be pulled again.

Firstly, because lower interest rates are having some effect on the areas of the economy which tend to be impacted, and secondly, because the drop off in mining capital investment - to date at least - has not been sharp.

The last round of ABS figures showed that mining capex may yet fall in a more measured fashion.

As a recap, these are the actual and expected figures for total capital expenditure:

Source: ABS

And this is part of the same data set for mining only capital expenditure, actual and expected:

Source: ABS

The estimates in the March quarter implied that the RBA still has some time on its hands before another cut will be needed.

The data for the next quarter will be released on August 29, so it will be interesting to note whether the June quarter figures hit expectations or whether we are on a steeper downward trajectory than feared.

However, as noted by RA, if unemployment does rise back to 6%, then that would likely be a trigger for another cut.

Best guess therefore: interest rates on hold for a couple/a few months, until a slowing of capital expenditure or an uptick in the unemployment rate sees another cut in the official cash rate to a new cyclical low of 2.25%.