I think the RBA will — and should — cut their cash rate 25bps to 1.25% at their 7 May meeting. They have a chunky downgrade to put through for growth, inflation isn’t expected to get back to their target ever, and there are no financial stability reasons for maintaining the current cash rate.
The Q4 Growth problem
The charts above and below shows what happened v. the RBA’s forecasts. The basic story is that growth was ~50bps weaker than they expected due to weakness in household consumption and dwelling investment. This was offset by surprising strength of public demand. That’s probably not going to be sustained going forward.
The Q1 slump
It’s early to declare Q1, but i feel okay doing so given base effect and the weak data we’ve seen to Feb’19.
The base effect of the weak end to Q4 is particularly challenging. Consider retail sales, for example. We only know Jan’19 (+0.1%m/m) but we can say with a high degree of certainty that Q1 real retail sales will be soft.
To see why, consider the below chart. Let’s assume that we get slightly above trend outcomes for nominal retail sales growth in Feb and March.
This would yield nominal retail sales growth in Q1’19 of ~20bps.
Assuming that retail inflation is flat (the lowest it’s been year is 10bps), that means the best you could expect for real retail sales is ~20bps.
Personally i think that retail inflation of 10bps is realistic, which gives you the below chart for real retail sales growth.
See the problem? So the growth downgrade should be larger than the ~50bps miss in Q4’18.
The RBA has been worried about a retail slump — and they have got one. Their is no financial stability reason to resist cutting the cash rate, and on current forecasts they never get (core) inflation back to target.
The only argument for not cutting is the Federal election (likely 18 May). The RBA has moved during an election campaign before. The most political thing they could do would be to NOT move despite the downgrade due to politics.