Weak building approvals figures and the Reserve Bank of Australia (RBA) Governor's frustration over persistently poor business confidence have increased expectations of an interest rate cut this week.
A game changing speech was delivered last week by the RBA Governor during which he not only gave the green light for an immediately lower cash rate, but also laid the framework for a long period of a low, and lower, cash rates.
Following are a few suggestions as to what the Reserve Bank Governor may be thinking at this time:
- Additional cuts to the cash rate would provide a stimulus to demand;
- The Reserve Bank is not overly concerned about the prospects of asset bubbles;
- A lower Australian Dollar would not pose a significant risk to the inflation outlook; and
- China is still expected to grow at a robust pace but the market needs to adjust to lower rates of growth.
Twice during his address to a business forum, Mr Stevens stated words to the effect that the recent inflation data does not appear to have shifted the RBA’s assessment of the scope to ease policy further if needed to support demand. At the time of the CPI data release, the market had thought that the higher than expected underlying inflation result (+0.6%) may have dented prospects for an August rate cut. This view has now changed and a rate cut now looks a shoo-in with the futures market pricing in a 92% chance that the RBA will reduce the cash rate this week to 2.50%, up from a 70% probability last week.
Assuming the RBA cuts the cash rate in August (and this is almost a “done deal”), bringing the rate to a new historic low, the obvious question becomes ‘what next?’. Financial markets are currently also pricing in over 50 basis points of rate cuts in the year ahead (refer graph below). Some economists are even calling a cash rate of sub-2%!
And then there’s yesterday’s announcement of the election date, called for September 7, and whether it has any implications for RBA monetary policy. I’d tend to think not, since the RBA has ‘form’ with moving rates pre-election, for example, raising rates on 7 November 2007 ahead of the 24 November election and cutting rates in October 2001 before the 10 November election. So, a rate cut remains “live” for tomorrow, I would expect.