RBA likely to wait until August to cut again: HSBC's Paul Bloxham

RBA likely to wait until August to cut again: HSBC's Paul Bloxham
RBA likely to wait until August to cut again: HSBC's Paul Bloxham


Today's RBA minutes, which record the deliberations that led to the 3 May cut in the cash rate, showed that the central bank had discussed both the possibility of cutting rates at that meeting or 'awaiting further information before acting'.

The minutes note that the board had an extensive discussion about the Q1 CPI figures and the outlook for inflation given the dynamics of the labour market and current weak wages growth. The apparent hesitancy to cut, relayed in the minutes, supports our view that the RBA will probably choose to wait for the Q2 CPI print, due on 27 July, before cutting further. Our central case sees the RBA cutting to 1.50% in August and holding steady at that level over the subsequent quarters.


The RBA published the minutes for its 3 May board meeting at which the central bank decided to cut its cash rate by 25bp to 1.75%. A cut was only 45:55 priced going into the meeting and 12 of 27 economists in the Bloomberg survey expected a cut (HSBC expected a cut).


Today's minutes revealed that the 3 May board meeting, in which the RBA cut its cash rate by 25bp to 1.75%, was a fairly close call. As the minutes noted, the board had 'discussed the merits of adjusting policy at [that] meeting or awaiting further information before acting'.

The minutes report that the board spent a considerable amount of time discussing the Q1 CPI numbers and the outlook for inflation. The key question was the extent to which the new CPI numbers, which had surprised significantly to the downside, provided a signal about the on-going trend in inflation and to what extent the weaker inflation print was temporary or due to measurement error.

In the end, the board determined that the new information did materially change the inflation outlook and they delivered a 25bp cut in the cash rate to 1.75% (as we had expected).

However, the degree of hesitancy revealed in the minutes suggests that the RBA is likely to be reluctant to follow-up with a further cut without further clear information on the disinflationary trend. To us, this suggests that the RBA is unlikely to cut further until after the next CPI print, which is due to be published on 27 July.

Despite making no changes to the RBA's growth forecasts, the central bank did make a significant downward revision to its inflation forecasts. Underlying inflation had previously been expected to run near the bottom edge of the 2-3% target band, but the new forecasts showed that it was expected to remain around 1-2% over 2016 and to pick up to 1.5-2.5% by mid-2018.

This adjustment to the forecasts seemingly reflects much more than just the downside surprise to the Q1 CPI print. Rather, it is significant shift in the way the RBA sees the interaction of growth, the labour market, wages growth and inflation.

We also see a significant part of the downward adjustment to the underlying inflation forecasts as tactical. In our view, the RBA now wanted a set of inflation forecasts where the chances of a downside surprise are very low. Further downside surprises to the inflation numbers could put the credibility of the inflation targeting regime at risk. They also wanted the inflation forecasts to bolster the easing bias, despite the cut that was delivered, and in doing so, put further downward pressure on the AUD. The sharp fall in the AUD since the board meeting suggests that this tactic has worked.

We see the RBA as likely to cut further. Our central case has another 25bp cut in the cash rate to 1.50%, delivered in August, just after the Q2 CPI print. We then expect that, over time, underlying inflation may very well be a touch stronger than the RBA is forecasting, allowing the central bank to hold steady and point out that, although underlying inflation is below target, it is moving in the right direction and ahead of the forecasts. In doing this, the RBA would make use of the flexibility that is explicit in its inflation targeting regime. We see the forecasts themselves as a device that the RBA is using to loosen financial conditions.


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