Preview: RBA's May meeting

The Reserve Bank Australia's (RBA) latest monthly Board meeting will take place in Sydney today, with the decision to be announced via the Governor's Statement at 2:30PM (AEST). The RBA's benchmark cash rate has been unchanged at 1.50% since August 2016. Today, financial markets are pricing in around a 40% chance of a 0.25% cut, while economists surveyed by Bloomberg Australia are closely divided at 14 (cut) to 12 (no change). While today's outcome is finely balanced, both the markets and economists are in alignment that a rate cut is coming, it's just a question of timing.  

As it stands | RBA's May meeting preview  

Last month, the Board held the cash rate steady at 1.50% for the 29th consecutive meeting, though there were two key developments. Firstly, the final line of the Governor's Statement was tweaked for the first time in around 2 years, noting that "The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time", whereas it had previously said that maintaining its stance "...would be consistent with sustainable growth in the economy and achieving the inflation target over time". That subtle shift pointed to a 'data dependent' approach going forward. Secondly, while the meeting minutes (released two weeks later) continued with the guidance that "there was not a strong case for a near-term adjustment in monetary policy", it mentioned the specific scenario in which the Board would be prepared to cut the cash rate; that being "where inflation did not move any higher and unemployment trended up".


Since then | RBA's May meeting preview

Given the shift to data dependency, there have been two main developments since the Board last met. Firstly, March's employment report indicated that labour market conditions remained robust (see here), with employment increasing by a net 25,700 in the month (expected +15,000). Annual employment growth lifted from 2.3% to 2.4% and continues to remain well in front of growth in the labour force. The unemployment rate lifted from 4.9% to 5.0% as expected, though the participation rate also increased by 0.1ppt to 65.7%. Hours worked lifted sharply in the month by 0.7%, as annual growth accelerated to 3.2%.

Secondly, Q1's inflation data was much weaker than expected on both a headline and core basis (see here). Headline inflation slowed to 1.3%Y/Y from 1.8%Y/Y (expected 1.5%), while the core measure (average of trimmed mean and weighted median) decelerated to 1.42% from 1.73% (expected 1.65%) and moved further away from the RBA's 2-3% target. However, it is important to isolate the trimmed mean measure, which slowed to 1.60%Y/Y from 1.82%Y/Y. The RBA's forecasts for core inflation refer to the trimmed mean (as per February's Statement on Monetary Policy). The Bank expects this measure to reach 1.75% by mid-year and 2.0% by the end of the year, so in that context, the deceleration was not as severe.    


Today | RBA's May meeting preview

It appears the key consideration for the Board will be around robust labour market conditions and a deceleration in inflation further away from the 2-3% target. On balance, given the labour market data has yet to deteriorate, it appears likely the Board will remain on hold today. The deceleration in inflation could be used to argue for a cut today, though the Bank has been consistent throughout recent communications in highlighting the importance of the labour market data, and in particular waiting to see how the 'tension' with slowing GDP growth resolves. With a resolution to that situation not yet clear and given the Bank is without an explicit easing bias, it may be a bit too early to see a move today.