From the always valuable TD Securities:
Could the RBA cut -50bp at once? While nothing can be ever ruled out, there are many mitigating factors that support more modest adjustments to the cash rate:
(1) the RBA are of the view that the impact of the strong AUD on inflation will eventually fade, so why surprise the market and dampen the AUD with a larger cut;
(2) the labour market remains robust by both Australian and international standards – in the last labour force report employment rose an outsized +44k, and the unemployment rate remains at a low 5.2% (about half that in Europe and the US, and full employment in Australia is 5%);
(3) the RBA’s track record of adjusting in +/-25bp increments short of an economic emergency over the last decade or so means that a larger move may actually be counterproductive and spook consumers and businesses, and may give the (false) impression that the RBA is playing “catch up” or is “behind the curve”; and
(4) we also guesstimate that by cutting in 25bp increments, the major banks are more likely to pass on a bigger proportion of the rate cuts as there are two separate decisions to justify. The RBA has said on many occasions that they consider the actions of the major banks when adjusting (or not adjusting) the cash rate.
Markets will adversely react to “only” -25bp next week
While consensus is for -25bp next Tuesday, financial markets are bound to be disappointed and re-price in a knee-jerk fashion given the various media and lobby group demands for a more aggressive -50bp cut. We suspect when the headlines proclaim a -25bp cut to 4%, the AUD could easily jump to the top of its recent $US1.02/05 trading range, and 3yr bond yields could swiftly test the top of its recent 3-3¼% trading range. However, as the RBA is likely to provide a follow-up -25bp cut in June, at least, we expect the ranges to be respected thereafter.
