Not today, but February for RBA rate cut: ANZ's Felicity Emmett

Not today, but February for RBA rate cut: ANZ's Felicity Emmett
Not today, but February for RBA rate cut: ANZ's Felicity Emmett

GUEST OBSERVER

After one of the most anticipated Board meetings for months, the RBA today left rates unchanged, but changed their forward guidance to open up the possibility of a near-term rate cut.

Specifically, the Bank included the comment “members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand”. The fact that the Bank included this statement despite noting that “prospects for an improvement in economic conditions had firmed a little over recent months” highlights to us the importance of the 2-3% target band for inflation for the Bank.

Overall there were quite a few changes in the statement compared with the October one:

Concerns over financial market volatility have eased with the comment that “volatility in financial markets has abated somewhat”, although the Bank noted that “credit costs for some emerging market countries remain higher than a year ago”.

The statement acknowledged the recent low inflation print, but repeated that “inflation is forecast to be consistent with the target over the next one to two years”.
The recent out of cycle mortgage rate increases were alluded to, but the RBA noted that “overall [lending] conditions are still quite accommodative”.

Importantly, the Bank seems more comfortable with Sydney and Melbourne house price developments, noting the recent moderation in growth.

Overall, today’s statement highlights the importance of inflation to the Bank. That is, despite the prospect of some improvement in activity the Bank seems prepared to ease monetary policy on the back of a lower inflation outlook. This then suggests that a move in December is unlikely. The RBA seems more likely to wait until February when it will have another inflation number which will likely confirm the lower than previously anticipated inflation trajectory. Then the Bank is likely to deliver the first of at least two cuts next year in our view.

While today’s statement suggested a better outlook for activity, we are not so sure. Our own view is that next year growth is likely to remain challenged as the boost from housing starts to fade, and the support to trade from the lower AUD lessens. While the upward trend in consumer confidence coming on the back of Malcolm Turnbull’s appointment as Prime Minister is encouraging, it’s difficult to see that it will be translated into sustained strength in spending in the medium-term given the prospect of ongoing soft wages growth amid high levels of household debt.

And any rise in the unemployment rate from its current elevated rate would be unpalatable for the RBA. So some further stimulus will be necessary, even if the impact is primary felt via a lower currency.

The easing in housing market activity in Sydney and Melbourne is also an important prerequisite for rate cuts. And today’s comments on housing suggests this key hurdle for further rate cuts is likely to be removed by early next year.

From here on it seems that a rate cut in February is most likely, and the data (both activity and inflation) will have to be sufficiently stronger to persuade the Bank otherwise. 

Felicity Emmett co-head of Australian economics, ANZ Research and can be contacted here.

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