The RBA elected to cut the official cash by 25 bps in May, thereby dramatically decreasing the likelihood of a rate cut in June. Economic data since the RBA chose to ease monetary conditions hasn’t been significantly bad enough to suggest that the bank needs to follow-up with another cut on Tuesday, nor has it been good enough to suggest that May’s cut was a one-off for that matter. We are awaiting retail sales data out of Australia later today, but we don’t expect it to significantly influence the RBA’s decision (expected +0.3% m/m, prior -0.4%). Furthermore, a significant devaluation of the Australian dollar last month removed some of the onus on the reserve bank to cut rates, although the dollar is still fairly high. We therefore suspect the RBA will remain on hold for now as it waits to fully assess the impact that prior easing will have on the real economy.
From a data perspective, strong employment figure for April and a somewhat encouraging Q1 capital expenditure report helps to tip the scales in favour of no action by the RBA on Tuesday. Australia’s unemployment rate dropped to 5.5% (prior 5.6%), although it’s still broadly trending upwards, underpinned by a surge in both full-time and part-time employment. In total over 50,000 jobs were added in April, which is a very strong number. While business investment was less than expected in Q1, the prospects for capital expenditure later this year and early next are encouraging, although the real test will be whether the forecasts live-up to actual expenditure. The housing market also continues to power ahead, with home loans rising 5.2% m/m in March and building approvals increasing 9.1% m/m in April.
Furthermore, in recent times one of the biggest hindrances to domestic growth has been the persistently high Australian dollar. Some of the pressure on trade exposed sectors has been removed by the recent deprecation of the dollar. However, the AUD may be one of the biggest threats to growth going forward if it significantly increases in value again. In fact, even around current levels it’s still somewhat detrimental to the country, especially with non-mining parts of the economy are looking like they are going to struggle to fill the gap that an anticipated peak in mining investment will leave in GDP. Thus, we still think the bank will maintain its dovish tone and may cut interest rates later in the year. This time around, however, the focus will be on the tone of the bank. A more dovish than expected statement from Governor Stevens could see the Aussie lose ground, while a more neutral stance could push the commodity currency higher.