RBA on hold in July, opening the door to an August cut – ANZ

Felicity Emmett, Head of Australian Economics at ANZ, notes that the RBA left the cash rate unchanged at 1.75% and introduced a soft easing bias in its post-meeting statement.

Key Quotes

“An August rate cut remains a close call. We think that low inflation and increased uncertainty will be enough to justify a rate cut.

Details

After omitting an explicit easing bias in the June post-meeting statement, the reintroduction of a soft easing bias in today’s media release suggests the August meeting is ‘live’. While activity and employment growth remains solid, inflation is weak and the rise in uncertainty both here and abroad suggests to us that further monetary policy easing is likely. We also think that the behaviour of the AUD will be important.

The rise in uncertainty associated with the Brexit vote and the Australian election is likely to weigh on confidence. Our analysis shows that higher uncertainty can dent confidence, triggering a rate cut from the RBA in order to prevent a spillover to the rest of the economy. Our ANZ Uncertainty Index rose sharply in June and consumer confidence has fallen, albeit from a high level. With uncertainty likely to remain high in July, we think that this could see a further decline in confidence, which would place additional pressure on the RBA to cut rates.

The Q2 inflation report will be a crucial input into the deliberations at the RBA’s August meeting as the staff updates their forecasts. The RBA currently expects underlying inflation to stay below the 2-3% band for the next twelve months, notwithstanding signs that very weak wage growth may finally be stabilising.

Apart from the final paragraph, changes to the post-meeting statement were minimal. The key change was the comment on Brexit, with the Bank noting that “financial markets have been volatile recently as investors have re-priced assets after the UK referendum.” We did not expect there to be any comment on the Federal election, although we assume it would have been discussed by the Board.

Outlook

In our view, the reintroduction of an explicit easing bias, albeit a soft one, opens the door to an August rate cut. We expect that weak inflation and rising uncertainty will trump the strong Q1 GDP data.”