RBA: “On balance” cuts 25bps to 2.25%

The RBA’s Board has made the decision to reduce rates earlier than NAB expected, but for similar reasons we expected a modest rate reduction in March. It suggests growth will be below trend for somewhat longer – and the unemployment rate will peak a little higher – than earlier expected.

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  • RBA cash rate cut 25bps to new low of 2.25%.
  • The Board on balance decided to ease based on the staff’s updated forecasts, which suggested growth was going to be below trend for somewhat longer – and the unemployment rate peak a little higher – than earlier expected. While the Bank expects lower oil prices to significantly support consumer spending, the lower terms of trade is reducing income growth. The risk to housing is mitigated by “the Bank working with other regulators to contain economic risks that might arise from the housing market”.
  • The Bank reiterated the view that the $A remained above most estimates of fair value, with a lower exchange rate (still) likely to be needed to achieve balanced growth.
  • The only indication in the final paragraph of a potential further near-term move was the use of the phrase “on balance”. This phrase was used consistently in easing statements during 2001: twice the Bank eased at the next meeting and once two meetings later. The market is now pricing a further cut by the April meeting and nearly a full further cut by the end of 2015. A near-term follow-up rate cut would reflect the Bank’s normal modus operandi of moving rates generally by at least half a percent in a reasonably short fashion to bring about a noticeably different level of interest rates. However, we remain open to the possibility that this may be more of a fine-tuning or one-off move in the near-term, with the possibility of a further move later in the year if growth does not improve or unemployment continues to rise. We will however review our forecast for a further rate cut in August after viewing the RBA’s revised forecasts in Friday’s Statement of Monetary Policy to see how different the Bank’s forecasts are to NAB’s forecasts.

The Bank’s Board has made a somewhat surprising decision to reduce rates a little earlier than NAB expected, but for broadly the reason we expected a modest rate reduction in March, namely that the rate of growth in the economy was likely to remain below trend for longer than previously expected, with the unemployment rate consequently rising higher than previously expected. Low inflation provided the opportunity for this action. The Bank reiterated the view that a lower exchange rate was likely to be needed to achieve balanced growth.

To us the final paragraph reads more like a gradual fine-tuning step, rather than necessarily the first of at least two rate cuts, though this is our pre-disposition and we will review our forecast of a further rate cut not occurring until August after the release of the Bank’s updated forecasts on Friday. The use of the phrase “on balance” in 2001 suggested near-term follow up action.

No doubt, most of the discussion amongst those very wrong-footed by the Bank’s move will revolve around the briefing of selected journalists over the past week. This likely reflects the fact that the Bank had few of the usual opportunities to shape market expectations over the quiet summer period, and also a desire to counteract the markets’ reduced pricing of a February move following the release of the higher than expected Q4 core CPI. That said, it does seem to logically fly in the face of the Governor’s speech last year at which he suggested that the Bank’s language would likely evolve ahead of a move from a period of stability before it raised rates. Again, the Xmas break may be the issue though we are reminded that the Bank usually moves rates earlier than one would expect. It also often tends to move in the months just ahead of the SOMP.

We will review our forecasts for a further cut in August after the release of the Bank’s updated growth forecasts on Friday when we will consider whether the Bank has a significantly different growth outlook to NAB’s forecasts. We still expect a further rate cut will be necessary this year. NAB is also reviewing its FX forecasts.

Read the full text of the Reserve Bank of Australia’s statement.

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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