Summary
That was the most exciting RBA meeting for two-and-a-half years. If you can stand it we might be back again on 4 June to see if the bank is tempted to cut. Key data to guide the RBA before then will come with the wages report on 15 May and the jobs figures on 16 May.
Anyway, here’s what happened today:
- The RBA board decided to keep rates on hold at 1.5% for the 30th monthly meeting in a row.
- Governor Philip Lowe signalled that “spare capacity” in the labour market trumped any concerns about slowing growth.
- Inflation might be weak but unemployment is still falling and that was the key.
- In a surprisingly upbeat statement, he said that the bank’s core scenario of strong growth remains, trimming just 0.25% from its forecast of 3% growth this year.
- The Aussie dollar rose smartly to US70.35c, while the ASX200 fell on the news.
- Many economists and market analysts predict the RBA will be forced to act next month, while others pointed to the current election campaign as a possible deciding factor in the RBA not acting now.
Thanks for joining us.
Westpac foreign exchange experts think the RBA decision will see the Aussie dollar push upwards.
Noting today’s spike in the dollar, the Westpac team says that it could reach US70.8C but that would represent a “sell”:
We would expect this move in the A$ to continue to push towards 0.7060/80. However, above that level we remain of the view that the A$ is a sell on strength.
In a break from recent emphasis, the RBA did note that the A$ “is at the low end of its narrow range of recent times” suggesting that the combination of the recently weaker currency and strong commodity prices is seen as a positive for the Australian economy.
Updated
David Bassanese of Beta Shares, has this. He had predicted a cut.
No RBA rate cut today, but the hurdle has been lowered. According to the RBA Statement, “further improvement in the labour market was likely to be needed for inflation to be consistent with the target. That means the unemployment rate no longer needs to rise (to say 5.5% from 5%) to justify a rate cut, it just needs to stop falling. It has been broadly steady for the past six months, so more of the same will see the RBA move.
I expect the unemployment rate to reach 5.5% by early 2020 given the housing downturn and soft consumer spending. My base case view (since early February) of 50bps worth of cuts by late this year/early 2020 remains in place.
Updated
The folk at financial comparison site ratecity.com.au lament that it could now be a few more months until mortgage holders get some reduction in their monthly payments.
But they advocate instead that you shop around for a better deal and earn yourself a cut anyway. Here’s Sally Tindall, research director at the site:
Australia didn’t get a rate cut today, but it’s still not off the cards. Based on today’s statement from Phillip Lowe, its likely they’ll hold off until they see more consistent trends in employment and inflation. But consumers don’t have to wait for the RBA to save money on their home loan.
The downturn in the market is putting pressure on banks’ bottom lines. What they need is more business on their books. The best way for borrowers to get a rate cut is to turn themselves from an existing customer into a new one.
The inquest is well under way into why the RBA kept rates on hold.
Having predicted a cut, the Capital Economics team is surprised. They are especially surprised that the bank has only trimmed its bullish forecast for growth this year by 0.25% to 2.75%. They call the RBA statement “rather upbeat”, signalling that they really wanted to say “too upbeat”. Capital expect the bank will have to cut soon though.
In conclusion, they say:
We are far more pessimistic about the outlook for GDP growth, the labour market and inflation than the Bank as we expect underlying inflation to remain below the Bank’s 2-3% target range. The upshot is that we still expect rates to be lowered over the coming months.
ASX200 down sharply
The stock market doesn’t like the RBA hold.
In the opposite to what was happening earlier when a cut was still a 50% shot, the ASX200 plunged at 2.30pm. It’s now up just 0.18% for the day, as opposed to .8% earlier.
Check this chart out:
The bank expects inflation – one of its key criteria in rate decisions – to pick up in the next year helped by higher petrol prices. That’s despite downward pressure from housing prices.
But it means that the RBA’s focus is now totally on unemployment. If it goes up, a cut is surely all but nailed on.
The inflation data for the March quarter were noticeably lower than expected and suggest subdued inflationary pressures across much of the economy. Over the year, inflation was 1.3% and, in underlying terms, was 1.6%. Lower housing-related costs and a range of policy decisions affecting administered prices both contributed to this outcome. Looking forward, inflation is expected to pick up, but to do so only gradually. The central scenario is for underlying inflation to be 1¾% this year, 2% in 2020 and a little higher after that. In headline terms, inflation is expected to be around 2% this year, boosted by the recent increase in petrol prices.
Updated
Talking of pelters:
The RBA is stuck in a corner. Cut rates, they admit they were wrong (strong factor). Raise rates, Australia Panics. If Australia panics and then rates are cut... it’s too late. They blew the mother of all credit fueled housing bubbles and that’s the price they pay
— Lindsay David (@linzcom) May 7, 2019
RBA political bias is not helpful for the economy. I suspect this is the death knell for the RBAs current structure and operation. Clearly easier policy is essential. I feel sympathy for those about to go on unemployment lists as a result of this error.
— Stephen Koukoulas (@TheKouk) May 7, 2019
I find it amazing in a world of slow growth and lowflation the #RBA isn't trying to run the economy as fast as possible to stop Australia from falling into the same trap as other places...and is happy with spare capacity
— Greg McKenna (@gregorymckenna) May 7, 2019
When they are ready to cut it will likely be too late
Aussie dollar rises to US70.45c
The Aussie loves that decision. It’s now up 0.8% to US70.45c.
Labour market still strong, says RBA
Lowe is also sticking to his view that steady unemployment means there is no convincing case for a cut. In addition that will lead to wage rises. He’s had this view for some time and gets pelters in the economic commentariat for it, but you can’t say he’s not consistent:
The Australian labour market remains strong. There has been a significant increase in employment, the vacancy rate remains high and there are reports of skills shortages in some areas. Despite these positive developments, there has been little further progress in reducing unemployment over the past six months. The unemployment rate has been broadly steady at around 5% over this time and is expected to remain around this level over the next year or so, before declining a little to 4¾% in 2021. The strong employment growth over the past year or so has led to some pick-up in wages growth, which is a welcome development. Some further lift in wages growth is expected, although this is likely to be a gradual process.
Updated
So that last sentence does leave some room for the bank to cut next time. More than 80% of economists surveyed by finder.com think the bank will cut by August.
But Lowe is sticking to his long-held view that infrastructure spending will rally the economy and that household spending will follow in its wake:
The central scenario is for the Australian economy to grow by around 2¾% in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.
Updated
The RBA has judged that the economy is OK for now and doesn’t need stimulating with lower interest rates.
Governor Philip Lowe said in his statement that:
The board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the board will be paying close attention to developments in the labour market at its upcoming meetings.
Updated
IT'S A HOLD
It’s a HOLD
Key test for Aussie dollar
We will be watching what happens to the dollar very closely after 2.30. It has hung grimly on to a level above US70c for some months now despite expectations that it would sink further.
It has crept up to US70.03 this afternoon. Maybe traders think the RBA will hold (higher rates = stronger currency generally speaking).
But today’s decision – if it is a cut – could see it break that barrier for some time to come against a background of weak growth and falling house prices.
Wondering if we're going to see a quick rip and dip in $AUDUSD if the #RBA delivers a dovish hold. (Keeps OCR at 1.50% but offers a dovish forward-guidance for monetary policy).
— David Song (@DavidJSong) May 7, 2019
The tension is mounting. And could there be a few nerves at RBA headquarters in Martin Place?
It’s worth noting that the RBA governor, Philip Lowe, has yet to either cut or increase interest rates in his two-and-half-year tenure. Quite a record. The last time they moved was downwards in August 2016.
Strong views as well from uber-dove Stephen Koukoulas. He has long called for rates to come down to stimulate the economy. He argues that the RBA – by following its strict criteria for cutting where inflation must be falling and unemployment also rising – has done nothing less than fail the nation:
It will be important that the Treasurer after the election revamps the RBA. Frydenberg must be totally annoyed that the RBA has been such a huge handbrake on the economy.
— Stephen Koukoulas (@TheKouk) May 6, 2019
A big test of RBAs independence today. If it fails to cut rates it will show itself to be beholden to the Coalition government. Its fragile credibility will be further undermined
— Stephen Koukoulas (@TheKouk) May 6, 2019
CommSec reckons there is a 44% chance of cut but there’s a lot of speculation around so what are people saying:
Eleanor Creagh of Saxo Capital Markets reckons the RBA will hold.
We expect the #RBA to remain on hold today, whilst unemployment not trending higher. But instead opting to further evolve policy guidance along the dovish path by adopting a formal easing bias. This will open the door for rate cuts in 2H once the easing bias is explicit https://t.co/6WV8Iy4YCv
— Eleanor Creagh (@Eleanor_Creagh) May 6, 2019
But independent economist and market strategist Greg McKenna reckons it must be a cut:
Here's the $AUDUSD section of my newsletter today where I briefly highlight why the #RBA should cut today
— Greg McKenna (@gregorymckenna) May 6, 2019
Now is the time to do it not later precisely because the employment market is strong#ausbiz #forex #markets pic.twitter.com/3q8zXHgPOg
Others prefer to hedge their bets:
Monthly retail sales a touch stronger than expected after a solid February, however quarterly volumes are weak, despite discounting being prevalent, wealth effect impacting and subtraction from Q1 GDP, nothing good about this but will lower rates fix it? #RBA #ausbiz pic.twitter.com/ssrIkk3vpZ
— Alex Joiner (@IFM_Economist) May 7, 2019
Cut or no cut on Tuesday by the #RBA, the guidance is going to be very interesting. One and done? No way. An easing bias is locked in. But how aggressive will it be? #ausecon #ausbiz
— James Glynn (@JamesGlynnWSJ) May 6, 2019
Around the grounds
The stock market likes the idea of a rate cut. The ASX200 is up 0.8% and has recovered the losses in yesterday’s Trump-inspired sell-off.
The index has rallied strongly this year to 11-year highs. This has largely been thanks to gains in Wall Street stocks as the US Federal Reserve has retreated from its hawkish policy of raising rates.
Likewise, investors in Australia like the idea of cheaper money as the more than decade-long bull run on world stock markets now looks like continuing.
The Aussie dollar is up fractionally but is still below US70c at US69.97c.
Elsewhere in Asia Pacific the picture is more mixed. In Tokyo, the Nikkei is down 0.7% as it returns to action after a 10-day holiday and the Kospi is down 0.9% in Korea. But Hong Kong and mainland China are back in the black after yesterday’s losses.
Updated
Retail sales figures bolster case for cut
The RBA has been assailed by poor data in the past few months – not least falling GDP - but also very weak figures on building approvals last week, which showed that 22% fewer dwellings were approved in March compared with the same month last year.
Earlier today data showed retail sales rose last month by a greater than expected 0.3%, helped by higher food and fuel prices. But weaker overall volume and continued pull-back from big-ticket household items was seized upon by experts as making the case for a cut.
Capital Economics noted that real retail sales fell in the first quarter of the year – the first fall since 2012:
Given the earlier weakness in retail sales in December and January and a strong increase in retail goods prices in Q1, real retail sales actually declined by 0.1% q/q in the first quarter compared to a rise of 0.1% in Q4. That’s the first decline in real retail sales since 2012 and a worrying sign.
Trade figures this morning showed the surplus narrowed slightly, another sign of subdued domestic activity, Capital said.
Updated
Good afternoon and welcome to our live blog on the Reserve Bank’s monthly decision on interest rates. The board is meeting in Sydney and a decision is expected at 2.30pm. The big question is whether or not the board will cut the rate from it’s already historic low of 1.5% as the economy faces headwinds including weaker growth, stagnant wages, very low inflation and falling house prices.
It’s been more than two years since the last cut. In each of the past 29 meetings the board – led by governor Philip Lowe – has decided to keep rates just as they are. But a growing number of economists now expect a cut either today or in the next two or three months.
To get you started, look no further than our own economics expert, Greg Jericho, who has forecast in his regular column this morning that the RBA will keep rates on hold – but only just. He judges that the RBA will not want to be seen cutting rates during the election campaign and will instead more likely wait until next month.
You can read his whole article here:
