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RBA Likely to Cut Once Again

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The Reserve Bank of Australia (RBA) left the door open for another rate cut while holding policy steady this week. Slower domestic growth and a challenging international environment will necessitate further policy accommodation this year. The RBA will likely cut 25 basis points to 2.00% in May, followed by an extended period of steady rates.

Growth and inflation moderated through the turn of the year, adding to the incentive for the RBA to implement a shock 25 basis point easing in February. Total CPI slowed to a 1.7% year over year growth rate in Q4 from the 2.3% growth clip in Q3. Further slowing to a 1.1% pace in Q1 is likely before a gradual pick-up to 2.0% by Q4 of this year. The annual growth pace of underlying inflation measures slowed in Q4 and further tame reading are seen for Q1. The weighted median slowed to a 2.3% year over year pace in Q4 from 2.6% year over year in Q3.

Underlying inflation remains at the lower end of the RBA’s 2-3% target range. The pull-back in prices globally and the threat to Australia’s growth from lower commodity prices poses substantial downside risk to growth and inflation this year, leaving the door open for another insurance rate cut.

Employment rose 15.6k in February, as expected after a revised 14.6k drop in January. Full time employment expanded 10.3k after a revised 30.9k drop in January. Part time hiring improved 5.3k after a 16.3k gain.

Will the RBA cut again from the current record low 2.25%? The February cut was implemented to boost a domestic economy that had lost the mining boom as China’s demand for Australia’s commodities flagged. In short, the Bank eased policy in February because growth was not picking up as expected. The policy move also fits into the broader context of RBA easing since late in 2011 in order to facilitate the shift to economic growth driven by non-mining industries as resource investment has fallen sharply.  Another insurance cut will help provide continued defense against further declines in inflation.

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