Forex Institutional Research: UBS RBA Implications

Forex Institutional Research: UBS RBA

Key quotes from the UBS RBA report: 

RBA cuts 25bp to 1.5%…on hold from here

RBA cut 25bp to 1.50%, as we expected At today’s August Board meeting, the RBA cut the cash rate 25bp to 1.5%, a new record low, as we expected (& in line with consensus). This follows their cut earlier this year in May, and is the RBA’s 12th cut in rates from their 2011 cycle peak of 4.75%. Key to today’s decision was the RBA concluding “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting” (…identical to its post cut comment in May). The RBA followed their normal practice of providing no explicit ‘forward guidance’ on policy at meetings where they adjust rates. We believe the RBA is likely to present only a weak easing bias, or even near-neutral statement, either in Friday’s SoMP or September’s post-meeting press release, consistent with our view that the RBA is now on hold.

RBA…August SoMP forecasts likely unchanged from May The RBA’s comments, despite the cut, stayed largely upbeat. The global economy was still seen “continuing to grow, at a lower than average pace”, with several advanced economies doing better, but some EM countries facing more difficulties. The RBA noted again that easier policy in China was supporting its growth, but added cautiously that the “underlying pace of China’s growth appears to be moderating”. The RBA noted again commodity prices had moved “above recent lows”, while markets were seen to be still “function[ing] effectively” post the UK vote, after an initial period of volatility.

For Australia, the RBA sounded slightly more confident, noting growth was “continuing at a moderate pace” despite weak capex (whereas last month it was just “continuing”), with some domestic areas of the economy (& exports) still expanding at or above trend. The RBA still sees jobs ‘leaders’ as “somewhat mixed”, but consistent with ongoing jobs growth. They viewed the current availability of credit (albeit removing their prior assessment that credit growth was moderate, due to recent slowing) – and the lower AUD since 2013 – as both helpful for the economy’s rebalancing, but again noted that were the AUD to appreciate, it could “complicate” this process.

On inflation, the “recent data confirm[ed] inflation remains quite low”…[and] this is expected to remain the case for some time”. The RBA dismissed concerns lower rates may raise financial stability issues in housing, noting “supervisory measures have strengthened lending standards” & in a new comment that this, together with “considerable supply of apartments” ahead, means that “the likelihood of lower interest rates exacerbating risks in the housing market has diminished”.

Implications: RBA now on hold at 1.5% The RBA’s May SoMP forecasts showed GDP growth around 3%, but inflation only reaching the bottom of the 2-3% target band by mid-17. These forecasts were based on a ‘rough’ (technical assumption) of an additional cash rate cut to 1.5%. With Q2 CPI in-line with those forecasts, the RBA has now followed through with that cut. While the growth data continue to signal a firm economy that’s rebalancing well (away from mining, back to domestic growth), the further slowdown in local wage growth & nontraded inflation, and a higher AUD since May, along with recent news on slower US growth and weaker oil prices, have all likely heightened the RBA’s risk they may not reach their mid-17 inflation forecast of 2%. While this has fostered an additional cut today, we believe already accommodative policy, firm growth data, a likely trend lower in the AUD and concern about financial stability will see the RBA on-hold at 1.5% for the foreseeable future. We expect Friday’s SoMP forecasts to remain unchanged.

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