Will the RBA cut the cash rate in August?
The Reserve Bank of Australia kept the official cash rate on hold at its June board meeting but a cut later this year isn’t being ruled out, with August being the most likely month.
RBA Governor Glenn Stevens’ statement was closely scrutinised after the announcement for any hint of an official “easing bias” (i.e. leaning towards cutting rates), but it revealed little. He said that: “the board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time”.
Inflation a key driver
The lack of an easing bias may signal the RBA won’t be cutting for a while but it is difficult to say. If it does cut in August, the June quarter inflation figure may be the driver. The Bureau of Statistics will release the June figure on July 27.
Inflation is an important factor in the RBA’s cash rate decision. It highlights how much goods and services are costing Australians and the RBA is committed to keeping it within the 2-3% range – a rate it feels supports economic growth while maintaining price stability.
The RBA will be closely watching the June inflation figure, especially in light of the low March number, which put inflation at minus 2%. This is the first time consumer prices had fallen since 2008, and put the annualised rate at 1.3%, well below the RBA’s target range.
Stevens acknowledged that inflation is low and said that this is expected to remain the case for some time, “given very subdued growth in labour costs and very low cost pressures elsewhere in the world”.
He added, “Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector.”
The low March quarter inflation figure was a factor in the RBA cutting rates in May by 0.25% and this is why economists are saying that another low figure is likely to prompt the bank to make another 0.25% cut in August. (August is when the first board meeting after the release of the June inflation number takes place.)
CommSec chief economist Craig James says on balance, rates still have the scope to fall. “It all depends on the Reserve Bank’s assessment on how fast the economy can grow without generating inflation above the upper end of the 2-3% target band,” he said.
In his economic research note following the RBA’s recent decision, economist Shane Oliver said that despite the absence of any clear easing bias, AMP believes the RBA will cut the rate again this year.
“The risks to inflation are on the downside to the RBA’s already below-target inflation forecasts thanks to underlying deflationary pressures globally and record low wages growth domestically,” he said. “What’s more, continuing delays to Fed tightening threaten to keep the Australian dollar elevated, which would be bad for both growth and the desire to boost inflation.”
He added it also appears that the Australian dollar is on its way back up again, “reflecting Fed delays and the RBA’s lack of a clear easing bias”.
Inflation is not the only factor that influences the RBA’s decision on rates: The Australian dollar is one it watches closely, along with the unemployment rate and economic growth. Australia’s latest GDP report showed the economy grew by 3.1% in the 12 months to March, the fastest year-on-year expansion since the third quarter of 2012. The strong growth was believed to be one of the reasons rates remained on hold at the June RBA board meeting.
The RBA will also be keeping a close eye on housing prices, which have again been rising. In his statement, Glenn Stevens said, “Dwelling prices have begun to rise again recently but considerable supply of apartments is scheduled to come on-stream over the next couple of years, particularly in the eastern capital cities.” House prices in May rose 3.1% in Sydney and 1.6% in Melbourne; they fell by 2.7% in Perth.
While a number of economists are predicting a rate cut for August, it is not a sure thing, but if inflation does once again come in lower than the RBA would like, the chances of seeing the cash rate cut will rise.