RBA: All Signs Point to Steady Rates in July

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Don’t expect the Reserve Bank of Australia to cut interest rates for the third month in a row when they meet this evening. Over the past two months, the RBA has been extremely aggressive with easing monetary policy, reducing rates from 4.25 to 3.5 percent. The 50bp move followed by the 25bp rate cut earlier this year was aimed at inoculating the economy against Europe’s debt crisis and slower global growth. According to the latest economic data from Australia and more neutral comments from RBA officials, the central bank has succeeded in providing a cushion for the Australian economy. While there hasn’t been a significant amount of data released since the last monetary policy meeting (many key reports are due this week), the close decision last month, recent improvements in data and the support provided by EU Leaders gives the RBA enough reason to pause in July. Of the 28 economists surveyed by Bloomberg, not one expects the RBA to ease and we expect the RBA statement to say that the decision was finely balanced, providing no clues to future monetary policy.

When the central bank last met, the decision to cut interest rates by 25bp was a very close one because the domestic economy was performing better than they had anticipated. Most of their concerns centered on the uncertainty about the future of Europe but a lot has changed since their June meeting. There is no longer the risk of a Greek euro exit and the decisions made at last week’s EU Summit neutralized the risks in Europe for the time being. Even the comments from central bank officials have been relatively optimistic. Earlier this month RBA Governor Stevens said Australians have become overly pessimistic and that an objective investor from the outside world would feel that “Australia’s glass is at least half full.” Deputy Governor Debelle added last week that the Australian economy is in a “good place,” confirming that there is very little urgency within the RBA for another rate cut.

The following table shows how the Australian economy has performed since the last central bank meeting. Job growth was particularly strong in the month of May while manufacturing activity contracted at a much slower pace in June. Stocks also rebounded and bond yields ticked higher. There are still areas of weakness, particularly in confidence and the housing market but with retail sales, service and construction sector activity reports scheduled for release after the RBA meeting, the central bank does not have enough inputs this month to make a decisive decision about further rate cuts.

However this does not mean that the RBA is completely done for the year. The RBA is an inflation focused central bank and the strong possibility of softer inflationary pressures in Q3 and Q4 means they may ease again. Also, if the slowdown in the Eurozone or Chinese economy exacerbates, the RBA could be pushed into action. The market is still pricing in at least another 25bp rate cut from the RBA before the end of the year.

Kathy Lien
Managing Director

3 thoughts on “RBA: All Signs Point to Steady Rates in July”

  1. Kathy, love your work, but are sure AUD will not lower rates ?
    I thought AUD wants lower dollar.

    Thanks a million for all you do. 🙂


  2. I’m not a trader — just need to move to US — do you think AUD will go back to 1.05 this year??? Thank you.

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