By Michael Witts

What did the Reserve Bank say in today’s meeting?

As widely anticipated the RBA kept the cash rate unchanged at the record low level of 1.75%.

The RBA appears reasonably content with the current level of activity in the domestic economy, commenting that “holding monetary policy steady would be prudent at this meeting. Further information should allow the Bank to refine policy as may be considered appropriate”.

This is a reasonably balanced assessment of the economy and can be interpreted in a number of ways to support the case for either a potential rate cut in August, following the June quarter CPI print at end July, or doing nothing.

Has anything changed since last month’s meeting? What is their view on Brexit?

In terms of the domestic economy, the position is largely unchanged. The RBA is marginally more upbeat in terms of the export sector, noting that the decline in the exchange rate over the past three years is helping the traded goods sector of the economy.

Like everyone, the RBA’s view on the impact of Brexit is a best guess at this point in time. Their view is that the impact will be largely concentrated on the UK economy itself and broader impacts may be hard to discern.

While this is undoubtedly a true statement at a point in time, the position is highly fluid. For example, a vote in the British Parliament is required during this process, so what happens if the Parliament votes against the referendum outcome? 

Recent Presidential elections in Austria will be re-run following a court challenge; in the original vote the nationalist, anti-European candidate came a very close second. A victory at the subsequent election may give rise to further exit discussions.

While the impact of the Brexit decision may initially be concentrated in the UK, a spread of exit sentiment may have broader implications.

Did they comment on the election?

The RBA did not comment on the domestic political status. It would be highly unusual for the RBA to get involved in the political economy; their role is to manage the monetary economy.

While the final result is unknown, it is clear that the Senate will require careful management to ensure the passage of legislation regardless of whichever party forms government. This suggests that the prospect of the new parliament running the full term is significantly reduced.

The rating agencies have commented that the AAA rating of Australia may be at risk if fiscal policy is relaxed and the deficit increased.

Can we expect another rate cut this year?

Market wisdom suggests that following the June quarter CPI, the RBA will lower the cash rate to 1.50%. However, the case for an August rate cut is not as clear cut as the market would suggest. There are a number of factors that may encourage the RBA to keep something in reserve in case events do not unfold as expected.

What is the RBA’s view on the Australian economy, global economy and the Aussie dollar? Is this different to ING Direct’s view?

As noted above and consistent with previous months, the RBA appears increasingly content with the state of the domestic economy.

Against the backdrop of low inflation, they retain the capacity to further adjust rates lower if/when the need arises. In this context, the key indicators will be;

  • the end July print of the June quarter CPI change
  • ongoing readings on the state of the labour market
  • evolving fallout from the Brexit vote
  • price inflation and turnover activity in the housing market.

The position on each of these indicators will be clearer by the August meeting, which suggests that a further reduction in the cash rate may be warranted.

The current level of the AUD, albeit lower over the past three years, still has further to go on the downside. The RBA notes that an appreciation of the exchange rate could further complicate the outlook for the domestic economy. In this context, the RBA has clear preference for a lower value of the AUD to share the burden in steering the economy.

Our view is broadly consistent with the RBA’s view. We continue to see solid growth in retail mortgage assets and customer deposits, suggesting that consumers are, by and large, comfortable with their financial position.

Consumer sentiment may be at risk due to the indecision regarding the election outcome, however this should pass once the election result is determined.

The strength of the export sector is perhaps under-estimated within the economy, however the subdued inflation and wages growth environment is not seeing this strength translate through to the income side of the ledger.