There is almost no contemplation of any outcome other than a rate cut today. Financial markets are priced near to 100% for a cut, while 29 out of 30 economists surveyed by Bloomberg Australia forecast the cash rate to fall to 1.25% -- as close to being in alignment as is ever likely to be seen.
At the previous meeting in May, the Board remained on hold in a finely balanced decision, in which markets and economists were roughly 50/50 divided on the outcome (see here). So, what has caused expectations to shift so definitively?
There are 2 main reasons for this, and both occurred on the same day on the 21st May. Firstly, the minutes from the May meeting (which are released with a 2-week lag) signaled that the Board had shifted to an 'easing bias' by noting that its forecasts for growth and inflation were conditioned on market pricing "which suggested interest rates were expected to be lower over the next six months" and that in the absence of an easing "growth and inflation outcomes would be expected to be less favourable than the central scenario". The Bank's forecasts in 2019 and 2020 for growth (2.75%) and inflation (2.0%) would indicate an economy only operating around par in a best-case interpretation.
Secondly, around 90 minutes after the minutes were released, Governor Lowe delivered a speech that gave further insight around the Board's easing bias. As outlined here, the RBA had been consistent throughout the year in highlighting the importance of the labour market in its decision making. Conditions therein had generally been more robust than the Bank had anticipated, though in April the unemployment rate lifted from an upwardly revised 5.1% to 5.2% (see here). Inflation in Q1 also slowed by much more than expected (see here). The critical observation from the Governor was that in order to bring inflation back up towards the 2-3% target, the unemployment rate would need to fall below the historical estimate of full employment at around 5.0%. Specifically, the Governor highlighted that "we (the Board) discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5 per cent mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate".
So there you have it, the conditions for the Board's threshold to cut have been met. Attention will initially turn to the decision statement for signs of what the Bank's next course of action might be, though for that we might be better served by waiting until 7:30PM (AEST) tonight where Governor Lowe is due to deliver another speech. Governor Lowe's speeches are always interesting and, not unlike what we have discussed here, they have had a habit this year of delivering more than what was expected by markets.
At the previous meeting in May, the Board remained on hold in a finely balanced decision, in which markets and economists were roughly 50/50 divided on the outcome (see here). So, what has caused expectations to shift so definitively?
There are 2 main reasons for this, and both occurred on the same day on the 21st May. Firstly, the minutes from the May meeting (which are released with a 2-week lag) signaled that the Board had shifted to an 'easing bias' by noting that its forecasts for growth and inflation were conditioned on market pricing "which suggested interest rates were expected to be lower over the next six months" and that in the absence of an easing "growth and inflation outcomes would be expected to be less favourable than the central scenario". The Bank's forecasts in 2019 and 2020 for growth (2.75%) and inflation (2.0%) would indicate an economy only operating around par in a best-case interpretation.
Secondly, around 90 minutes after the minutes were released, Governor Lowe delivered a speech that gave further insight around the Board's easing bias. As outlined here, the RBA had been consistent throughout the year in highlighting the importance of the labour market in its decision making. Conditions therein had generally been more robust than the Bank had anticipated, though in April the unemployment rate lifted from an upwardly revised 5.1% to 5.2% (see here). Inflation in Q1 also slowed by much more than expected (see here). The critical observation from the Governor was that in order to bring inflation back up towards the 2-3% target, the unemployment rate would need to fall below the historical estimate of full employment at around 5.0%. Specifically, the Governor highlighted that "we (the Board) discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5 per cent mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate".
So there you have it, the conditions for the Board's threshold to cut have been met. Attention will initially turn to the decision statement for signs of what the Bank's next course of action might be, though for that we might be better served by waiting until 7:30PM (AEST) tonight where Governor Lowe is due to deliver another speech. Governor Lowe's speeches are always interesting and, not unlike what we have discussed here, they have had a habit this year of delivering more than what was expected by markets.
