Will the RBA Cut Rates?

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Later today the RBA will meet to decide on its rate policy, setting up the most important economic event for the month for the AUD.

It also could give us the most volatility because there’s no fully formed consensus on what the RBA will do. Some analysts argue that a rate cut is a sure thing, while others say the market is getting ahead of itself.

The bank cut the reference rate as recently as their last meeting, so this would be the first back-to-back cut in over a decade. However, the market is arguing that further stimulus is needed.

In the last policy statement, Governor Lowe somewhat agreed. He said that it was “unrealistic to expect that lowering interest rates by a quarter of a percentage point will materially shift the path we look to be on.”

Evidently, a rate cut is in the cards, the question is how soon. Many are citing that statement as evidence for a cut in July, while others point to the bank’s history to argue that the bank will pause for at least a month.

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What Are the Real Expectations?

The odds favor a rate cut. Just under 70% of surveyed analysts are betting the RBA will take action this time around. This would take the rate down to a historic low of 1.0%. The theory is that since the bank doesn’t think that just a quarter of a point is enough, they’ll get the second cut done right away and then see if the policy takes effect.

Expectations are for a total of two rate cuts this year. Further action by the RBA is not priced in until 2020. Barring any unexpected events, we shouldn’t expect the RBA to take any unconventional actions.

Running Out of Room

In that line of thinking, the Bank had stated previously that they see the lower bound of rates at 0.5%, indicating they are running out of ammunition. Given the slowing economy and lack of pickup in inflation, the bank might want to try to take strong action right way, in order to leverage two consecutive hikes.

It should also be noted that the last hike was arguably delayed by a month due to the election. This has led to some analysts saying the bank is behind the curve. Especially with strong rumors that the US and EU will also be cutting this month.

And the Dissenters?

The argument from the minority is that the difference between July and August from a policy perspective is small, and the bank might want to gauge the reaction to the first hike. The other factor is that over the next couple of weeks, we will be getting Q2 data. And, of course, there is reason to get all the latest info before making a move.

The most recent development is the conclusion of the G20 meeting. There, Presidents Trump and Xi came to an agreement to restart trade talks. The market is hopeful that this will reduce some of the trade stress on the global economy.

And the market?

Just a week ago, the odds of a rate cut were in the low 90 percent. But, since then, they have been trickling back. Without a clear consensus, it’s hard for the market to price in the action (or lack thereof) of the bank. Therefore, we should expect extra volatility no matter what.

However, with the odds higher for a cut than for a hold, we ought to see a stronger reaction should the bank decide to not act.

In addition to the rate cut, there will be quite a lot of scrutiny on the Monetary Policy Statement that comes out with it. Analysts will want to know whether the Bank is settling in to see what will happen over the next months, or whether it is still looking for more action.

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