The RBA Board lifted the cash rate by 50 basis points to 1.35%.That move was expected. The details in the Statement indicate nothing to dissuade us that the next move in August, following the release of the June quarter Inflation Report, will also be 50 basis points. To support our view that the Board will then pause we will need to see a significantly different Statement in August than we have seen in June and July.
The Reserve Bank Board decided to increase the cash rate target by 50 basis points to 1.35% at its Board meeting today.
This decision was expected by Westpac and widely expected by the market and other analysts.
The the Governor’s Statement provides ample flexibility for the next Board meeting on August 2.
Key points from the final “policy” paragraph are: “further step in the withdrawal of extraordinary monetary support”; “The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead”; “the size and timing of future increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”
There is one point of difference from the June Statement that is worthy of notice.
A key issue is whether the Board sees that this 50 basis point move signals a significant change in the policy stance – for example moving policy from stimulatory to neutral. We assess the neutral range as 1.5-2.0% so the 1.35% means that policy is still stimulatory.
In the final “policy” paragraph one of the few changes is to exclude the description of the level of rates “still very low level of interest rates”. “Very low” is not replaced with another description but the exclusion of “very low” has some significance. However, that exclusion should certainly not be interpreted that the Board believes that policy is now in the neutral range.
In our analyses of the previous decision in June we pointed out that although there was no mention of inflationary expectations in the June Statement we expected that the Board is highly sensitive to managing those expectations. That a key reason why we have been advocating decisive upfront moves to emphasise the Board’s commitment to returning inflation to the target over time.
In today’s Statement the Governor emphasises that “medium term inflation expectations remain well anchored and it is important that this remains the case”
He also highlights the importance of the Inflation Report which prints on July 27 – “a full set of updated forecasts will be published next month following the release of the June quarter CPI.”
The description of the labour market is even more upbeat than in June. On “underemployment” the description has changed from “a further decline is expected” to “has fallen significantly.”
But there seems to be increased confidence in the prospects for lowering inflation. In June the description was” increase further but then decline back towards the 2–3% range next year” to “forecast to peak later this year and then decline back towards the 2–3% range next year.” Arguably, this extra lift in the interest rate has materially improved the prospects from the Bank’s perspective of containing the inflation pressures.
Both Statements point out the importance of the data on the household sector. They both discuss the high savings rate; the pressure on budgets from higher inflation and higher interest rates, although the July Statement points adds that the “recent spending data being positive.”
Conclusion
From our perspective the key objective of scrutinising the Statement was to detect whether there appeared to be any clear signal that the Board planned to scale back the sequence of 50 basis point moves which we have now seen for two consecutive months.
Since the RBA began announcing the cash rate publicly in 1990 it has never raised the cash rate in two consecutive meetings by 50 basis points each. However, the Governor’s statement made no reference to that historical precedent something that may have been done if he was signalling the intention to scale back the moves.
Neither did he assess that the stance of policy had moved from stimulatory to the neutral range.
He sounded more confident about the inflation outlook while observing that the real time data on the labour market and household spending had lifted.
He stopped referring to rates as “very low” but did not substitute that term with a more moderate assessment.
Of some significance was the new emphasis in the Statement of the importance of inflationary expectations.
And most importantly he implied that the June quarter Inflation Report would be pivotal to future decisions.
With all this in mind and given our upbeat forecast for the June inflation report (5.9% headline; 4.2% trimmed mean) we are very comfortable that the Board will decide on a further 50 basis point lift at the August 2 meeting.
However, we are expecting the Board to pause in September and October.
To justify that expectation, we will need to a significant change in the August Statement – highlighting how far rates have moved in such a short time; describing the rate of 1.85% as in the neutral zone; noting the much higher frequency of RBA meetings than other central banks; while firmly indicating that further increases will be required.
