As widely expected, the Reserve Bank of Australia (RBA) cut rates by 25 basis points to 3.6%. The decision was unanimous, in contrast to July’s decision. The opening statement was slightly dovish, with officials suggesting that:
- Forecasts continue to point to inflation moderating towards the mid-point of the Bank’s 2–3% target inflation band; and
- Forecasts assume the Bank will remain on a gradual easing path.
The remainder of the meeting statement attempted to balance various upside and downside risks to the economy and continued to underscore a heightened state of uncertainty. Interestingly, officials have held on to their May view that heightened uncertainty could cause the private sector to delay spending and borrowing.
In the August Statement on Monetary Policy (SoMP), the Bank highlights that it has downgraded its growth forecasts, but downgraded its estimates of supply side (potential) growth as well, leaving the inflation outlook little changed.
All that said, leading indicators of inflation do not suggest that inflation is moderating towards the mid-point of the 2-3% target band. For example, the National Australia Bank (NAB) survey and inflation swaps suggest that inflation may even be re-accelerating outside the band again in early August. Furthermore, it is not clear that there is enough spare capacity in the economy to entrench the disinflation that the RBA expects. Indeed, our proprietary RBA “Taylor rule”, based on resource utilisation and our estimate of the neutral rate, continues to point to a higher equilibrium cash rate than the current level.
Why then has the RBA delivered a cut with unanimous support? We suspect officials are trying to win back some credibility with the private sector after the confusion following the July meeting, which delivered no change. We believe references to global uncertainty have been maintained partly because of large downward revisions to US non-farm payrolls, which have put pressure on the Fed to cut rates.
