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Tuesday, July 3, 2012
Macquarie: No sign RBA predisposed to cutting rates again soon
There is certainly no sign that the RBA is predisposed to cut rates again soon. The RBA concluded that "there has been a material easing of monetary over the past six months", and that with domestic growth and inflation expected to be close to trend -- but with weaker global growth -- monetary policy was "appropriate". There was certainly no hint that the RBA was eagerly awaiting the upcoming CPI data to confirm that inflation was low or that it would be closely monitoring international developments to ensure that the stance of policy remained appropriate.
In our view, the popularity of an August rate cut with economists could just be an artefact of recent history. The market has had very aggressive rate cuts priced in over 2012 and the RBA's decision to cut rates by 50bps in May was perceived as confirming that trajectory. Suddenly, the debate was not whether the RBA would cut again in June, but whether they would cut by 25bps or 50bps (and possibly even more). And it was during this period that most people pencilled in an August rate cut.
Since then, the RBA Governor has delivered markets a reality check. The minutes of the June Board meeting revealed that it was a toss of the coin whether the RBA would cut at all in June. And the justification for cutting in June -- taking out some insurance against the risk of a European implosion -- turned out to be a policy loosening for something that failed to materialise. That doesn't mean that such a move was a mistake. But presumably it does raise the bar for further rate cuts.
Moreover, the message of the RBA Governor's "Glass Half Full" speech -- that things are not that bad and that monetary policy should not "try to engineer a return to the boom" -- provided no support for the notion that further aggressive easing was on the cards. Finally, the domestic economic data have been mixed. While there have been some disturbing signs of weakness in items like business confidence and job vacancies, these are generally second-tier indicators. The first-tier data -- GDP and employment -- have been healthy, as the RBA acknowledged in the statement following the July Board meeting. And it appears that the RBA continues to view the China glass as half full, rather than half empty, as well.
So where does this leave us? The key domestic data event in the lead up to the August RBA meeting will be Q2 inflation. The TD-MI inflation gauge is suggesting that quarterly inflation will be 0.5/0.6% which is consistent with the RBA's May forecasts. So, if inflation is much weaker than this, then it would open the door for an August hike. But we don't think a 0.5/0.6% result would shift the RBA's position.