Following two consecutive rate cuts, RBA is widely expected to leave the cash rate unchanged at 1% in August. Incoming economic data since the last meeting have also supported the pause. Yet, given the aggressive target in the longer-term unemployment rate, downside risks to growth and ongoing uncertainty in the US- China trade war, another rate cut is still likely in 4Q19. We expect the members to open the door for further monetary easing at the meeting.
Economic data have showed improvement since the last meeting. Headline CPI rebounded to +1.6% y/y in June, from +1.3% a month ago. This also came in better than consents of +1.5%. RBA’s weighted median and trimmed mean CPI also stayed unchanged at +1.2% and +1.6%. However, all readings have stayed below RBA’s inflation target of 2-3%. Retail sales improved to +0.4% m/m in June, from +0.1% in the prior month. On the job market, the number of full time jobs gained +21.1K, compared with May’s increase of +2.4K. The unemployment rate stayed largely steady at 5.2% in June. This has stay far below RBA’s target of 4.5%, a point at which inflation is expected to be boosted.
Meanwhile, downside risks to growth remain. Markit’s services PMI slipped -0.3 point to 52.3 in July, driven by “a weakening trend in new business inflows”. The accompanying report added that “despite a solid increase in new export business, overall sales growth moderated notably from June, expanding at a modest pace, as domestic demand
conditions softened”. The manufacturing PMI also dropped -0.4 point to 51.6 in July. The reading was below the average seen over the first half of the year, indicating “only a modest improvement in the health of the manufacturing sector”.
Data released during the inter-meeting period showed modest improvement in the economic outlook. We expect this give the central bank some room to stand on the sideline so that it could evaluate the impacts of the rate cuts adopted in June and July. Yet, we believe the central bank has not done with monetary easing. Comments from RBA Governor Philip Lowe have remained dovish. In a speech two weeks ago, Lowe affirmed that “the board is prepared to provide additional support by easing monetary policy further”, if “demand growth is not sufficient”. According to him “whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the target range”. At the meeting statement, we expect RBA to retain the guidance that “The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time”.