The AFR’s Alan Mitchell, who called the May cut as well as anyone, has a note out today saying that the RBA would not have cut 25bps to 2.75% on 7 May if the currency had been around the current level.
If the Australian dollar had been sitting at its present rate of about US98¢ on May 7, it’s a fair bet that the Reserve Bank board would not have cut the official cash rate to 2.75 per cent.
The board minutes don’t say that of course. But had the dollar been more in line with the economic fundamentals, the RBA’s own forecasts for the next two years would have been stronger, and so would business confidence.
The exchange rate was far and away the biggest fly in the economic ointment.
The Australian dollar has depreciated 5 per cent against the American currency and 3.5 per cent against the currencies of our major trading partners since the board’s decision at the May board meeting.
And with it has fallen the probability another cut in the official cash rate in June. The foreign exchange market is doing some of the bank’s heavy lifting.
A 0.25 percentage point cut in the cash rate doesn’t make much difference to economy, and the bank normally wouldn’t bother unless it thought there was a reasonable chance that would end up wanting to move the rate at least 0.5 of a percentage point.
But as the dollar has depreciated and monetary conditions have eased …
This means we can pretty much rule out a June cut. I expect that the RBA’s next window is in August, following the Q2 CPI report.