RBA on hold, with little forward guidance: HSBC's Paul Bloxham

RBA on hold, with little forward guidance: HSBC's Paul Bloxham
RBA on hold, with little forward guidance: HSBC's Paul Bloxham

GUEST OBSERVER

No surprises as the RBA held its cash rate steady at 1.75 percent.

Of course, this follows an action-packed and finely-balanced May meeting, where the central bank cut to a new record low. Now the question being asked is: what's next and when? Is it one and done, or is there more to come?

The statement was very light on any hints about what might happen next. In short, there was no real forward guidance. The statement noted that 'inflation has been quite low ... [and that] ... this is expected to remain the case for some time'.

At the same time, it noted that non-mining domestic demand has been 'expanding at a pace at or above trend'. In our view, the RBA will need to see the Q2 CPI print (due on 27 July) before it would consider cutting further. Our central case is for a 25bp cut in August, to 1.50%, and for the RBA to remain on hold in subsequent quarters.

Facts

The RBA held its cash rate unchanged at 1.75 percent, as expected by 25 of 26 economists in the Bloomberg survey (including HSBC). Immediately prior to the announcement the market was pricing a 6 percent chance of a 25bp cut.

Implications 

Is it one and done, or is there more to come? Well, if you are looking for hints in today's post- meeting statement, you may be sadly disappointed. It was more backward-looking than usual and contained very little that could be described as forward guidance.

On growth, the statement described the Q1 GDP figures suggesting that, despite 'a very large decline in business investment' non-mining domestic demand had been 'expanding at a pace at or above trend'. At the same time, it stated that 'inflation has been quite low' and that this was expected 'to remain the case for some time' (the one clear reference to the future). The RBA noted that low inflation was due to 'very subdued growth in labour costs and very low cost pressures elsewhere in the world'. The statement did not attempt to reconcile the apparent disconnect between the strong local growth and weak inflation.

On the housing market, the statement noted that although 'supervisory measures have strengthened lending standards' ... 'dwelling prices have begun to rise again'. It then also noted that 'a considerable supply of apartments is scheduled to come on stream' leaving the reader to draw the conclusion that boosted supply might help to slow housing price growth in the future.

More generally, the statement noted that low interest rates and the lower AUD are assisting the rebalancing act to proceed, although the central bank repeated that an 'appreciating exchange rate could complicate' the rebalancing of growth.

Finally, the statement noted that a key reason for not moving this month was that the RBA had just cut the cash rate in May. Again, this is quite backward-looking. It seems to us that the central bank will need to see the Q2 CPI print (due on 27 July) before it would consider cutting further. 

PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 

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