RBA rate cut coming, but not this month, say major banks

Punters betting on a Melbourne Cup rate cut should seek long odds, according to three of the major banks. 

ANZ, Westpac and Commonwealth Bank have all highlighted the RBA’s less concerned outlook on inflation following the release of the minutes of the October board meeting as well as expectations that inflation figures will be revised down when quarterly figures are released on October 26.

The banks expect the Reserve Bank to keep its hand on the pause button for at least another month, weighing up solid domestic growth prospects against global economic concerns. 

Westpac chief economist Bill Evans says the minutes of the RBA’s October meeting provide confirmation that the board now sees scope for monetary policy to ease. 

Evans highlights the belief among RBA board members that an improved inflation outlook, “if confirmed by further data, would increase the scope for monetary policy to provide some support to demand, should that prove necessary”.

According to Evans, the implication of revised inflation figures is enormous. 

“In the space of three months we would see the bank move from forecasting a clear breach of the inflation target for two consecutive years to staying comfortably within the target and in fact seeing a modest slowdown through 2011,” he says. 

Furthermore, Evans points to other weaknesses in the local economy such as house price depreciation, a drop in business confidence and expectations of a softening labour market. 

However, he says global markets have rallied since the “absolute low point”, which coincided with the October 4 decision, while the Australian dollar has recovered significantly. 

As a result, Evans says the bank is sticking with its December rate cut call, which it first made back in July. 

“At this stage we retain our call for a December cut while recognising that the inflation print for the September quarter could easily open the door to an earlier move,” he says. 

Commonwealth Bank senior economist Michael Workman says the most likely scenario is that the RBA will leave the cash rate at 4.75% in coming months rather than opt for a rate cut. 

“We think that the rate cut case is incomplete and the medium-term outlook still favours a higher, not lower, cash rate,” he says. 

“The data released since the October board meeting had not added to the case for a rate cut. The markets’ reactions to the EU proposals to resolve their debt problems are the next major international hurdle for domestic monetary policy considerations,” Workman says. 

ANZ senior economist Craig Michaels is forecasting a 0.5% month-on-month increase in inflation for the September quarter, which would make it increasingly likely that underlying inflation would be under the upper limit of the RBA’s target range of 3% by year-end. 

“Such a significant change in the short-term inflation outlook, with the RBA previously forecasting underlying inflation of 3¼% by end-2011, in our view suggests there is minimal cost to a small 'insurance' rate cut of 25bps come Melbourne Cup Day,” Michaels says. 

However, should RBA ease monetary policy, ANZ expects only a modest easing cycle, which “may well be unwound in late 2012 or early 2013, should growth pick up more strongly than expected”. 

“This contrasts with current market pricing of sharp easing over the next few months, which appears to factor in a disaster scenario in Europe,” ANZ says.