Solid downward surprise required to prompt another rate cut from RBA

The Reserve Bank of Australia (RBA) left interest rates on hold at an historic low of 1.5 percent earlier in September following cuts in May and August. The minutes released today showed that the Board judged the current stance of monetary policy was consistent with sustainable growth in the Australian economy and achieving the inflation target over time.

Reserve Bank of Australia flagged that growth remains in line with expectations and remains unperturbed by the housing market. The central bank appeared to be relatively relaxed about recent developments in the housing market.  The minutes continued to downplay the recent pick up in auction clearance rates, and noted the low turnover in markets and that credit growth was lower than a year earlier.

Regarding mining and the investment outlook, the RBA noted an “improvement in sentiment in parts of the mining industry”, although it continued to note a further “large decline” in mining investment in 2016-17.

"Notwithstanding the RBA’s inflation forecasts pointing to an easing bias, our central case remains that rates will stay on hold at 1.5%. This assumes that the Q3 CPI will show underlying inflation broadly in line with the RBA’s forecast trajectory, where we think a solid downward surprise would be required to prompt another rate cut." said ANZ in a report.

RBA Governor Lowe’s parliamentary appearance on Thursday will be of interest to markets. Lowe is expected be more positive about the economic outlook in Thursday’s testimony, albeit with inflation still remaining low for an extended period. Lowe is likely to echo Assistant Governor’s Chris Kent’s relatively positive speech last week in being relatively upbeat in his assessment of the economy.