After the rate cut, RBA likely to stay on hold for a while: HSBC’s Paul Bloxham

Paul Bloxham, the chief economist at HSBC, says given the recent improvements in the labour market and business conditions, combined with the fact that rates are now at expansionary levels, the rate cut could be the end of the loosening cycle.

“The RBA surprised the market and economists by cutting by 50bps today, with most expecting only a 25bp cut,” he says, noting only two of 29 economists in the Bloomberg survey expected the cut.

And that the market had only 32bps priced in, suggesting pricing was for a less than one-third chance of a 50bp cut.

“This was the first cut that was larger than 25bps (aside from the post-Lehman's emergency cuts in 2008/09) in over a decade.

“With inflation no longer a constraint, the board clearly felt that they could afford to provide some further support for demand.

“As the statement notes 'economic conditions have been somewhat weaker than expected, while inflation has moderated',” he says.

“There was also an explicit nod to the fact that the RBA clearly does not expect that the full 50bps will be passed through to lending rates.

“The statement notes that a reduction of 50bps in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.

“Having cut by 50bps, the RBA now seems likely to stay on hold for a while.

“Indeed, given the recent improvements in the labour market and business conditions, combined with the fact that rates are now at expansionary levels, we think this could be the end of the loosening cycle,” he says.