The below-forecast releases of Australian inflation data for the first quarter has almost confirmed a rate cut at tomorrow’s RBA meeting – the question now remaining whether the central bank will deliver 25bp or 50bp in cuts.
According to market positioning and pricing, RBA rate cuts have been on the agenda since August last year, with the market perhaps getting overzealous in looking for 170bp worth of cuts over the following 12 months back in November, as per Credit Suisse’s OIS implied index. Two sets of 25bp cuts did follow in November and December but at the start of this year the RBA surprised with a (in hindsight temporary) wait-and-see stance.
This is now about to change, with the markets suggesting a 25bp cut is guaranteed and an almost 40 percent chance of 50bp, which would bring the Cash Rate Target to 3.75 percent, the lowest since February 2010. The last cut of more than 25bp came in February 2009 where the Cash Rate Target was slashed 100bp in the aftermath of the 2008 global financial crisis. From an RBA perspective, those times are now behind us.
The Australian economy has been firing on just one cylinder for at least the last 12 months (admittedly it is a big cylinder – the mining/resource sector) but data outside this sphere has seen a lackluster and unimpressive performance. Domestically, the Australian consumer is still cautious and housing market activity has fallen to its lowest levels in more than 10 years (today’s HIA new home sales were down 9.4 percent m/m, seasonally-adjusted.) The manufacturing sector has also struggled to maintain any kind of traction over the last 18 months (manufacturing PMI has managed only 5 readings above the key 50 expansion/contraction threshold) and with the threat of a slowing China reducing its thirst for Australian natural resources, the calls for a dramatic rate cut are intense from the local business community.
Given the RBA’s slow and steady approach historically, I suggest that a 25bp cut will be delivered tomorrow, though with a guidance for further cuts to come, with current market expectations of 100bp worth of cuts over the next 12 months likely to be fulfilled sooner rather than later.
Andrew Robinson,
SAXO BANK