The Board's decision to cut by 25 basis points to 1.25% in June was taken "to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target". The key shift from the Bank is that it now views 'full employment' to be consistent with an unemployment rate of 4.5% compared to its historical estimate of 5.0%. This was highlighted in speeches from Governor Lowe and Assistant Governor Ellis. Recall that the Bank has a mandate to target inflation between 2-3% and full employment.
In the period since June's meeting, the minutes showed that the Board retains a firm easing bias by noting "members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead". This was extended upon by Governor Lowe during his speech on June 20 The Labour Market and Spare Capacity by noting: "It is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target".
Perhaps adding support for the case to cut today, the Governor outlined early last week at the ANU's Crawford Australian Leadership Forum (link here) that in the global context where central banks in the US, Europe and Japan are expected to ease policy rates over the next 12 months in response to growth and inflationary concerns, the stimulatory impact from further cash rate cuts through exchange rate depreciation would be constrained. Certainly, the outlook for global growth remains a key risk for the RBA given that the weekend's G20 Summit was unable to provide any clear resolution in US-China trade tensions.
From a domestic standpoint, key data over the past month have been soft. GDP growth slowed to a 1.8% annual pace in Q1 to be around 1ppt below trend (see here), while the national unemployment rate held at 5.2% in May (see here). It is therefore likely that the Bank will downgrade its growth and inflation forecasts in next month's quarterly Statement on Monetary Policy. Given its existing forecasts are based on a cash rate at 1.0%, there seems little justification in waiting until August to cut, particularly considering the Governor's comments around exchange rate depreciation from last week. Note also that at 7:30PM (AEST) the Governor is scheduled to deliver a speech where further explanation could be provided in the event that a cut is announced. This was the approach used by the RBA following June's rate cut decision.
All considered, expect to see the cash rate cut by 25 basis points to 1.0% today. For reference, markets are around 70% priced for a rate cut, which is also the call from 18 of 26 economists surveyed by Bloomberg Australia.
All considered, expect to see the cash rate cut by 25 basis points to 1.0% today. For reference, markets are around 70% priced for a rate cut, which is also the call from 18 of 26 economists surveyed by Bloomberg Australia.
