Next move by Reserve Bank of Australia on rate cuts

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Australian Economy, Uncategorized

Outcome of RBA’s June ‘16 Meeting

The Reserve Bank of Australia’s (RBA) move on rate cut was in line with market expectations and accordingly RBA maintained a neutral stance on the prospective rate cut at its June monetary policy held earlier this month. The RBA left the cash rate untouched at 1.75% as it was very unlikely of the central bank to opt for interest rate cuts in June. At the RBA meeting there existed a probability of indicating a possible easing in future but however to everyone’s surprise, its closing statement did not provide any guidance on future moves.

rba1

Interest rate decisions (Source: Reserve Bank of Australia)

 

Drivers Influencing RBA’S Neutral stance

  • With the Global economy continuing to grow at a rate lower than the average rate, the RBA however feels that Australian economy is growing at par with the global economy and doesn’t need further easing.
  • Commodity prices’ recovery have put Australian economy slightly in a better position.
  • In the past few months, Australia’s financial markets have not been much affected by any drastic changes in the global Markets. Also Australia’s financial sector has been affected positively, as cost of funding has been very low for high quality borrowers due to monetary policies across the world being adjustable.
  • Domestic Demand levels have been increasing owing to low interest rates
  • Dip in exchange rates in-spite of higher commodity prices, has boosted exports and consequently the Australian economy
  • Increase in production output levels due to various firms undertaking business expansion has convinced RBA to keep the rates unchanged. Business expansion has been possible due to increase in the credit facilities given to the businesses.
  • Recent Australian Economic data has indicated that its overall growth has been on track, further strengthening RBA’s action of not easing of the monetary policy currently. The central bank was upbeat on the below parameters in the economic data like economic growth touching its annual highest levels in 3-1/2years; GDP growth in March 2016 delivering above expectations which rose by 1.1%; April unemployment rate continuing to remain unchanged at 5.7%.
  • The May rate cut brought about a momentary revival in the housing sector.
  • The RBA action primarily revolves around inflation data. As it needed more information regarding this, the central bank decided to side-line its stay on the interest rates till August.

inflationj

Inflation trend (Source: Reserve Bank of Australia)

 

Both sides of the knife based on RBA‘s neutral stance

  • Appreciation of the Australian Dollar resulting from RBA ‘current stance would offset the benefits arising to the economy from the dollar value due to the May‘s rate cut.
  • Neutral stance indicates that RBA’s May’s easing may be sufficient to bring inflation back to its target range without bursting any of the asset bubble.

 

Outlook

The RBA in its previous rate hikes chose to opt for an explicit easing bias, but they did not give any guidance in their recent meeting. Rather than providing a definite plan on bringing back inflation to its target range within the stipulated period, RBA is willing to wait and see how the inflation and wage data trends develop before deciding whether to touch the rates or not.

Meanwhile, some analysts expect that despite extending the forecast period for inflation, RBA would not be successful in bringing back inflation to its target range until and unless it opts for further rate cut. Moreover, regaining its target inflation range would become even more difficult if the Australian Dollar continues to appreciate. Accordingly, markets are bracing for another rate cut in August. But if the RBA opts not to cut rates in August it should opt for an explicit easing bias.


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