RBA keeps cash rate on hold; strong likelihood of easing in August

During its meeting on Tuesday, the Reserve Bank of Australia’s Board decided to keep the cash rate on hold at 1.75 percent, as widely anticipated by markets. The central bank also introduced a soft easing bias in its post-meeting statement.

The RBA provided a hint of the rate’s future direction. It stated that “over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.

The statement does suggest that movement in rates is likely in the future and that it would depend on further information.

The RBA noted that recent data imply that Australia’s overall economic growth is continuing in spite of a huge drop in business investment. It mentioned that inflation has stayed quite low.

The central bank expects the low trend in inflation to continue for some time, given the weak growth in labor costs and very low cost pressures elsewhere in the world.

On the housing front, the central bank noted that the lending standards in the housing market have been bolstered by the impacts of supervisory measures. Housing prices have grown again in several regions of the country in the recent months. However, significant supply of apartments is expected to come on stream in the next couple of years, especially in the eastern capital cities.

The RBA had omitted an explicit easing bias in its post-meeting statement in June; however, with the reintroduction of a soft easing bias in the Tuesday’s statement, a rate cut seems more likely in August, noted ANZ in a research report. Given the weak inflation and increase in uncertainty at home and in abroad, there is a high possibility for the central bank to further ease policy. Furthermore, the AUD’s behaviour is expected to be vital, added ANZ.

The heightened uncertainty linked to the Brexit vote and the Australian election is expected to be a drag on sentiment. Increased uncertainty might dampen sentiment, setting of a rate cut from the RBA in a bid to avert a spillover to the rest of the economy. Given that uncertainty is expected to remain high in July, confidence is likely to further deteriorate, that would exert additional pressure on the central bank to lower rates.

The second quarter inflation report would be quite vital for RBA’s August meeting. The central bank, commenting on Brexit noted that “financial markets have been volatile recently as investors have re-priced assets after the UK referendum”. The reintroduction of an easing bias opens door to an August rate cut, according to ANZ. Subdued inflation and growing uncertainty is expected to trump the solid first quarter GDP data.