RBA Gov Lowe delivered a speech that was widely interpreted as locking in a 25bps rate cut in June. The market now has a ~90% chance of a 25bps cut priced in for the June meeting — with a follow up 25bps reduction of the cash rate priced at a probability of ~60%.
The awkward thing about this is that there’s almost nothing in the speech that was new. The heart of Lowe’s case for lower rates is that the NAIRU is lower than they’d thought before … but that’s old news. Lowe said in November that the NAIRU was more like 4.5%, and he told Parliament that again in February.
Perhaps it’s even lower now? Possible, but these things move slowly — and in any case Lowe poured scorn on the idea that these things can be precisely estimated when he spoke to Parliament in February.
So the lower NAIRU isn’t new — and it’s unlikely that the RBA’s NAIRU estimate moved by much. Moreover, it’s been clear for some time that multi-decade lows of the unemployment rate weren’t getting the job done (in terms of inflation targets) anywhere else in the world — so the global picture Lowe painted in the first part of the speech isn’t new either.
So what changed?
Looking over the speech, deduction leads me to conclude that the RBA gave up on the idea that the unemployment rate might fall all by itself. Recall that the RBA had the upside risk “Labour market conditions could improve by more than expected” in the Economic Outlook Chapter of the May SOMP.
Lowe trashed this risk in the 3rd last paragraph of the speech:
The labour market has surprised on the upside over recent times, and it could do so again. While we can’t rule out this possibility, the recent flow of data makes it seem less likely.
So the RBA is now reasonably sure that the unemployment rate isn’t going to continue to decline all by itself — and if it’s not going down, the RBA will cut rates to try and push it down. How much? well the May SOMP forecasts assumed 50bps of cuts and they were still pretty rubbish … so the first 50bps is a lock.
In case you’re worried about easing on too many channels, Lowe endorsed a multi-pronged approach, saying that he favored the concurrent use of monetary, fiscal and structural policies to support investment and hiring.
And why not? The RBA has missed their inflation target for years and don’t currently expect to hit their target until some time (way) outside their forecast envelope.