The decision to leave the cash rate unchanged at 3.85% was a surprise at the time but it was mostly about buying time for confirmation from the Q2 CPI report. And they pretty much got that with trimmed mean inflation falling to 2.7% year-on-year and that was down from 2.9% year-on-year in Q1.
A 25 bps rate cut for tomorrow is fully priced in now with markets even pricing up to ~63 bps of rate cuts by year-end. The question now is, how much can the RBA realistically deliver in the months ahead?
Inflation developments seem to be moving along, but rather slowly and that is precisely why the RBA has been so cautious even up until now. As such, I wouldn’t expect the central bank to deviate all too much from their current guidance/language.
If you’re thinking the RBA will tee up another rate cut by December or even provide hints for one in September or November, I reckon you’d be disappointed. As things stand, the key for policymakers is to hope that inflation developments stay the course while observing further deterioration in labour market conditions.
If we do see both criterias be met, then that will set the RBA on course to cut the cash rate further. Otherwise, they will have to take things one step at a time.
The cash rate now stands at 3.85% and is likely to be reduced to 3.60% tomorrow. Analysts are estimating the neutral rate somewhere closer to 3%. The RBA hasn’t been explicit about agreeing to that but at this stage, you can definitely say that they are still feeling their way to neutral territory.
As such, further easing in the labour market will let them gather more confidence as to where that is and how much more they need to cut during this cycle. But if labour market conditions hold up, that will keep them guessing as well in looking to the months ahead.
Given the market pricing, I reckon there’s limited scope for downside to the Australian dollar. That unless the RBA surprises and leans more on the dovish side, which I would argue would not be prudent at the moment.
With the RBA perhaps only having enough room to deliver one more rate cut after August, there is upside potential for the aussie depending on the data. And we won’t have to wait long to get a sense of that, with the next Australian labour market report coming up later this Thursday on 14 August. And the next one after that will be on 18 September, before we get to the 30 September policy decision.
This article was written by Justin Low at investinglive.com.