Last week experienced a fair amount of volatility in the wake of the RBA’s surprise growth downgrade on Tuesday and RBA Governor Lowe making clear in a speech Wednesday that the RBA’s latest monetary policy bias has now become balanced or neutral from slight tightening bias previously. Then on top of that we had the fallout following the release of the banking royal commission report and finally the White House watering down the prospects of a US-China trade deal….phew!
The upshot of all this saw financial markets move to further factor in the potential for an RBA rate cut (yes, rate cut), yields rallying with some parts of the yield curve trading to a three-year low, a weaker equity market (although bank stocks did post a gain last week) and a two cent fall in the Australian Dollar.
For me, monetary policy looks set to remain on hold for the foreseeable future. The RBA won’t cut the cash rate while it sees economic growth running above trend and unemployment falling. However, if that view changes, then the natural response will be to cut the official cash rate. Nonetheless, there seems little chance of a rate hike in the foreseeable future given the balance of risks in the economy are to the downside and inflation remains below the RBA’s 2% to 3% target. Therefore, financial markets will continue to price in the chance of a rate cut rather than a hike.