Thursday, 30 April, 2015

RBA May Decision Could Tilt In Favor Of Rate Cut

— RBA Rate Cut May Needed Due to Further Growth Downgrade By Sophia Rodrigues SYDNEY (MNI) – Arguments in favor of a rate cut next week from the Reserve Bank are becoming more compelling as the Australian dollar continues to strengthen and the bank eyes a lowered growth forecast. It may be a close run thing, but after two months of standing pat and signalling less urgency to move, the Reserve Bank of Australia may now be tilting in favor of a 25 basis point rate cut to 2% when it meets on May 5. The RBA’s cash rate decision is due next Tuesday at 1430 hours local time (0430 hours GMT). Among the 20 economists polled by MNI poll, only two expect a cut. MNI reported on April 21 that the RBA could still make a further cut in May but by delaying a month or two it would maintain a stance that is keeping the Australian dollar under pressure while giving policymakers the chance to weigh up more data on the state of the economy. Should it make another cut the worry is that it would then have to remove the tilt toward easing that has been its stance since the current cut cycle began. And the RBA remains concerned that lowering rates from the current record 2.25% could promote more asset price gains, especially in the housing market. But the ground is shifting, and that could influence the board when it meets to discuss next week. A key argument for moving now is the Australian dollar, which has recently rebounded to around $0.8000 and could rise further if the RBA doesn’t cut from the current 2.25%. Other arguments in favor of a move include a downgrade in growth forecasts caused by the high exchange rate and a cut in the export growth outlook. A delay in the rebound of non-mining investment is also among key reasons for action. A further downgrade in the growth forecast could be expected once all of these arguments are bundled into the new set of forecasts for the Statement on Monetary Policy. Failure to do so risks inconsistencies if there’s no cut to accompany these gloomier forecasts. February’s cash rate cut may have been a surprise to many economists and market participants, but that move was also largely driven by downgraded growth forecasts. The RBA has maintained an easing bias since the February cut, and has clearly signalled this bias in its cash rate statements and minutes. Only a few days ago, Governor Glenn Stevens was saying that the board has “clearly signalled a willingness to lower it even further, should that be helpful in securing sustainable economic growth.” That said, the RBA has shown reluctance to act on this bias, partly because it couldn’t draw a clearer conclusion on whether the economy was slowing enough to justify another cut. A further push-back in non-mining business investment and fall in commodity prices argue for another cut but signs of improvement in the labor market are a counterweight to these. Similarly, while the RBA is concerned about the impact of the lower cash rate on an already-buoyant housing market, this may not prevent them from moving. Instead, it’s that new set of forecasts which is likely to give a clearer picture of a slowing economy in need of another rate cut. There are other factors at play too, including changes in monetary policy from the Reserve Bank of New Zealand. Earlier Thursday, the RBNZ shifted its rate bias to easing from neutral, causing a move higher in the Australian dollar-New Zealand dollar cross. This move has prevented the threat of the cross moving to parity, making it easier for the RBA to act. –MNI Sydney Bureau; tel: +61 2-9716-5467; email: srodrigues@mni-news.com

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