– RBA Defies Calls for a Rate Cut –

8th of May, 2019

The RBA defied calls for rate cuts when it met yesterday, leaving the cash rate on hold. The accompanying statement suggests that it is becoming a case of when, not if, the cash rate is eventually cut.

It was the most highly anticipated meeting by the RBA for some time with the market and economists alike split on whether or not a cut would be delivered for the first time since August, 2016. While the RBA did eventually leave rates on hold, they gave clear insight into the outlook for monetary policy over the months ahead.

If you haven’t read it already, the full statement is worth a read. Despite the recent slowdown in activity indicators and weak inflation read in the first quarter, the RBA remains confident in their central scenario. They still expect growth to eat into the slack in the labour force which will in turn support consumption and lift inflation.

However the last paragraph summed up the outlook for monetary policy very succinctly:

“The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.”

The RBA’s admission that the data at present is of concern and the outlining of the key performance indicators that it will be watching gives us clear direction on the outlook for the cash rate.

We don’t get another read on inflation until the end of July, right before the August meeting, which means employment data in the interim will be the key.

Employment outcomes have continued to defy the weakness witnessed in activity and growth indicators and how this resolves itself will determine what happens to the cash rate over the months ahead. If the current trend continue, it is likely only a matter of time until employment growth comes under pressure.

That makes next weeks employment update crucial to the outlook for monetary policy. One soft outcome won’t be enough to sway the RBA, which means the June meeting is likely to see the RBA remain on hold. If we were to get back to back soft employment outcomes, it would make the July meeting very interesting.

However , unless employment growth completely collapses, August shapes as the next crucial juncture for monetary policy as by then the RBA will also inflation data for the second quarter.

David Flanagan

Director - Interest Rate Markets