July minutes confirm ongoing caution among RBA ranks
Following publication of the Reserve Bank of Australia (RBA)’s July Monetary Policy Board meeting minutes on Tuesday, Commonwealth Bank’s senior economist Belinda Allen has restated her expectation of an August interest rate cut.
However, markets should not get overly excited, as the minutes highlighted a degree of ongoing caution among the Board’s ranks.
The RBA surprised markets and economists when it decided to hold the bank rate at 3.85% on a 6-3 majority vote in July.
Commenting on the newly published minutes, Allen surmised that the hold was rooted in caution, with members preferring to wait for the release of quarterly inflation figures before making further moves.
Allen said: “Ultimately the on‑hold decision was driven by a cautious approach to cutting the cash rate further. The minutes make it clear that a July rate cut would have been at odds with the cautious strategy they were adopting.”
She added: “The discussion also confirms our suspicion that the timing of the last two Board meetings mattered. A dovish discussion in May was heavily influenced by downside scenarios in the global economy. By July downside risks had largely dissipated.”
The minutes confirmed that the Board is now more focused on domestic data, particularly inflation and labour market trends, explained Allen.
While CBA remains confident that the RBA will cut the cash rate by another 25 basis points in August, “as long as the annual trimmed mean CPI continues to moderate from its current rate of 2.9%”, “it is not a done deal”, Allen warned.
Nonetheless, CBA’s forecast for an August cut echoes the wider market sentiment, with the banking majors currently plotting the following paths:
- CBA: Expects two additional rate cuts in August and November, bringing the cash rate to 3.35%
- Westpac: Expects four further cuts – in August, November, February, and May – bringing the cash rate to 2.85%
- NAB: Expects three more cuts in August, November, and February, bringing the cash rate to 3.1%
- ANZ: Expects two more cuts in August and November, bringing the cash rate to 3.35%and signs of a loss of momentum in activity were also discussed.
Quarterly inflation data by way of the CPI is due to be published on 30 July, followed by the RBA’s next rate call on 12 August.
This CPI print "is critical", said Allen. "Despite the unemployment rate shifting higher to 4.3%, the RBA Monetary Policy Board has shown they remain focussed on returning inflation to the mid‑point. A shift lower in the annual rate of trimmed mean inflation should be sufficient to see the cash rate lowered in August. Market pricing for an August rate cut is over 100% priced".
But, she warned once again, "it is not a done deal".
