At today’s February meeting – the first for 2015 – Australia’s RBA cut the cash rate 25bp, on the side of the ~60% chance priced into markets, but against the consensus of economists (with only ~1/3 calling Feb, albeit ~3/4 saw a cut by March). This is the first change since -25bp in Aug-13, 18 months ago, & takes it to a record low 2.25%.
As is typically the case, there was limited forward guidance. Little should be read into this, as it’s relatively standard practice to provide minimal guidance on a cut, as was the case when they eased in both May and August 2013. The ‘period of stability’ for rates was removed (as we expected), replaced by the usual comment that the Board judged a further decline in the cash rate was “appropriate”. This decision reflects the RBA taking account of “recent information and updated forecasts”. Just how much forecasts are reduced will provide some insight into the likelihood of further near term rate cuts.
Nonetheless, the RBA’s willingness to cut rates ‘pre-emptively’ despite higher-than-expected core CPI outcome of +0.7% q/q in Q4-2014, suggests the RBA may have taken the view that global forces have intensified sufficiently to justify lowering the cash rate sooner rather than later. This would be to counter the recent falls in commodity prices, likely weaker near-term growth and to protect the AUD’s recent move lower from the threat of renewed capital inflows as oil drives global inflation and yields lower.
Reflecting this, we now pull forward our forecast for a follow-up 25bp cut to March, albeit still with the risk that the RBA may still choose to wait until May to confirm the lower trend in growth and the next inflation print for Q1-2015. Nonetheless, we still do not expect the RBA to reduce the cash rate below 2%. This is because the easing of financial conditions from the combined impact of 50bp of rate cuts in 1H15 and an AUD that’s likely to continue lower toward our USD0.75 forecast.