The AFR’s star RBA watcher, Alan Mitchell says that the RBA doesn’t need to cut rates at their July meeting.
But, for the moment, the central bank is off the hook, if it wants to be.
The seasonally adjusted labour force data showed the unemployment rate falling in May, from 5.6 per cent to 5.5 per cent.
That is what the financial market is focused on. The drop in the seasonally adjusted unemployment rate might have been just statistical “noise”, but it was enough to cause the market to cut the priced-in probability of another cut in the official cash rate in July from 45 to 32 per cent.
A decision by the RBA board to sit on its hands in July would be uncontroversial, and probably that is what it will do.
Here is the problem: no one knows for sure if the RBA has cut interest rates by enough. You and I might think the bank will need to cut some more, but the people on the RBA board have to worry about the risk that they already have cut too much.
I happen to think that the RBA has more work to do, but the data over the last few weeks hardly helped the case that was made by the weak details of the Q1 national accounts.
If they were on the edge following Q1 GDP (and i think they were) the stable unemployment rate will have encouraged them to judge that the Q1 national accounts were maybe a bit weaker than was actually the case.
Reflecting this … Mitchell says they should not cut in July. I think they should, but at this point in the monthly cycle, when all the major data is in, it pays to listen. What i am hearing is that the RBA plans on waiting to see Q2 CPI.
All things considered it was not too much of a surprise when, in the wake of the Australian dollar’s 10 per cent depreciation against the currencies of our main trading partners, the RBA governor, Glenn Stevens, seemed to raise the bar for further rate cuts.
Announcing the RBA board’s decision to leave rates on hold in June, Stevens repeated the bank’s by now routine reassurance that it was ready to cut interest rates if that was appropriate. However, this time there was a sting in the tail of the announcement. The RBA board, Stevens said, “judged that the inflation outlook, as currently assessed, may [my emphasis] provide some scope for further easing, should that be required to support demand”.
What that says to me is that information about what is going on in the economy is at an even higher premium.
They shouldn’t cut rates when they don’t have to – and, on the current data, they don’t have to in July.