Curve Daily Commentary, May 6, 2015

RBA Delivers but Still Surprises


The RBA delivered another cut to the cash rate yesterday, taking it to a record low of 2.00%. While there were no real surprises in their decision, the accompanying statement did draw some very interesting reactions.

Interestingly the statement contained some more optimistic elements that we have become accustomed to, with Governor Stevens saying that “the available information suggests improved trends in household demand over the past six months and stronger growth in employment”. This is a move away from the ‘gradual’ improvement that had been the cornerstone of recent statements. 

Bottom of the cycle
Despite the improvement, the RBA still felt the need to cut, with Stevens saying that
“the Board judged that the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”.  The RBA has little choice other than to transition the fate of economic growth away from the mining sector and into consumers hands as the key drag on private demand is likely to be weakness in business capital expenditure in both the mining and non-mining sectors over the coming year”

The lack of guidance from the RBA has seen the market reduce its expectations for a follow up move, with only a 50/50 chance currently priced in by the end of 2015. It also suggests, given the specific reference to the US Federal Reserve, that they are banking on the FOMC to raise rates later this year, which should finally help to drive the AUD dollar down. 

There are still a number of questions being asked of the RBA and the outlook for monetary policy. Many of these are likely to be answered in this Friday’s SoMP.