The Reserve Bank disappointed mortgage borrowers and shocked market economists by keeping interest rates on hold in July.
But it’s worth remembering that just a couple of weeks ago, the general expectation was that we’d need to wait until August for the next rate cut.
That all changed when the Australian Bureau of Statistics released its monthly Consumer Price Index (CPI) Indicator from May on June 25, which showed headline inflation at 2.1 per cent over the past year and the RBA’s preferred, more stable trimmed mean measure at 2.4 per cent.
That’s below the mid-point of the RBA’s 2-3 per cent target band, hence why most of us who try to follow the central bank’s thinking thought it would cut sooner rather than later.
The only problem? The Reserve Bank doesn’t trust the monthly ABS numbers.
“The monthly CPI is not a full CPI, each month has different components in it,” RBA governor Michele Bullock said at the press conference after Tuesday’s meeting.
“If you look at the monthly numbers, they bounce around a lot, and the other thing is that the trimmed mean for monthly isn’t calculated the same way as the quarterly.
“So there’s a number of reasons why we take a little bit of a signal from it but we don’t really depend on it.“
Aside from making you wonder why the ABS bothers collecting monthly CPI figures that the RBA largely disregards, this leaves us following the pattern from earlier this year, where the RBA has waited for the more reliable (and out-of-date) quarterly inflation number before it decides to move rates.
We’ll know about the August rate decision on July 30
So, if you want to know whether the Reserve Bank will cut interest rates at its next meeting on August 12, you only need to wait until July 30.
That’s when the ABS releases the June quarter inflation data.
And 2.6 per cent is the number to watch out for.
In its latest economic forecasts, from the May meeting where it last cut rates, the RBA tipped a 2.6 per cent annual trimmed mean inflation rate.
If the ABS figures hit that mark or lower, then an August 12 rate cut is all but certain.
“If it comes in as we think it will, continuing to decline, then that validates our easing path, so that’s what we’re waiting for,” Bullock explained at the presser.
If they are higher, then there will be some debate about whether the RBA waits until September 30.
“We don’t want to end up having to fight inflation again. We want to make sure we’ve nailed it,”
the RBA boss said.
Westpac’s chief economist Luci Ellis, who used to perform much the same role at the Reserve Bank until two years ago, thinks a further delay is possible, but unlikely.
“There is a (small) risk that even August is too soon for the RBA, if the CPI surprises on the upside,” she warned in a note late on Tuesday.
“Our own current nowcast for June quarter is marginally above what their May SMP (Statement on Monetary Policy) forecasts seem to imply.”
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Although we know that a third of the monetary policy board (three out of nine members) thought there was already enough evidence to cut rates now, a position Ellis agrees with.
She also thinks that it was likely the RBA staff recommended holding rates this month, although Bullock wouldn’t confirm that or reveal how she or any other board members voted.
“While votes are unattributed, we think it is unlikely that the external board members all voted to hold while the governor, deputy governor and new Treasury secretary all voted to cut,” she argued.
“It is more likely that the governor, deputy and some external board members aligned to a staff recommendation to hold, but not all the external members were convinced to wait.“
Will the next rate cut be 0.25 or 0.5 of a percentage point?
But, if inflation is confirmed as being on track, then another question might arise at August’s meeting. That is how much to cut.
Less than a fortnight before that meeting Donald Trump’s latest tariff deadline expires.
By August 1, we’ll find out whether the US president has struck a raft of trade deals, has reinstated tariffs at the “Liberation Day” levels that shocked financial markets and sent them into a tailspin, or has opted to kick the can down the road a little bit longer.
By the day the RBA makes its next rates decision, August 12, the world will find out whether China and the US have reached a deal that allows the world’s two biggest economies to keep trading with each other, or whether the effective trade bans of tariffs of up to 145 per cent are re-imposed.
While Australia is not expected to suffer much direct fallout from US tariffs, because we’re only being hit with the lowest 10 per cent rate for most industries, the hit to our biggest export destinations — China, Japan, South Korea — could be severe.
The RBA governor repeatedly denied that the bank was “keeping its powder dry” to be able to respond in the event of a financial meltdown.
But she also observed that the RBA now had a lot more scope to cut interest rates in response to any crisis, compared to right before COVID when the cash rate was already at a record low 0.75 per cent.
“It’s possible that financial markets will react to all of these sorts of things. We’ve seen it in the past,” she told reporters.
“At the moment, they are remarkably sanguine, and so anything can happen.“
A 0.5 percentage point rate cut? Even 1 percentage point if the US bond market and dollar melt down next month?
Who knows … anything can happen.