Prior to the RBA’s July meeting, my hunch was that the RBA would drop back to a weak easing bias. I still think that’s where they are, despite the fact that the minutes suggest they did not even discuss an easing of monetary policy.
with a material easing in monetary policy having occurred over the preceding six months or so, and with recent signs that the domestic economy had a little more momentum than had earlier been indicated, members saw no need for any further adjustment to the cash rate at this meeting.
This is lifted from the final paragraph of the RBA’s minutes to the July Board meeting – released yesterday.
While retaining a slight easing bias, on account of the global backdrop, the board appears to have put more weight on the better than expected Q1 GDP result and the recent firming up of retail sales than i anticipated. Consistent with the basically steady unemployment rate, they now judge that growth has been around trend.
They expressed some concern about data quality, but were generally a little more upbeat on the current assessment than i expected.
The RBA targets their inflation forecast, so i don’t think that the Q2 CPI number is all that important for figuring out what happens to monetary policy in August. They cannot do much about inflation over the next six to twelve months: so if they think that the recent firming of demand is likely to be sustained (so that they revise up their growth assumptions in the Q3 MPS) it seems most unlikely that the RBA will be cutting in August.
A low enough CPI result would do the trick – certainly another 0.3%q/q would get a cut – but I think that the demand data is much more important.
We have June building approvals and retail sales before the RBA’s 7 August decision: both interest rate sensitive sectors that will give us some information on the impact of the 50bps cut on 8 May and the 25bps encore on 5 June.
Right now, I’m guessing that the trend improvement in both series will be sustained, and that CPI will not be sufficiently low for the RBA to move rates.
So long as Europe holds together, the next ‘live’ window seems likely to be the Nov meeting – by which time we may have seen some evidence that the unemployment rate has actually moved out of the 5% to 5.5% range it’s been tracing since mid 2010.
If I’m right about the short-term outlook, the ‘wrongest’ bit of the short end is the 45bps of cuts priced in until October. That should be ~11bps (25% chance of -25bps, 5% chance of -50bps, and ~2% chance of a 100bps cut).