It’s the most exciting time of the month again – coming up to the first Tuesday! The Reserve Bank’s Monetary Policy board will be meeting on the coming Tuesday, 2nd of July, to make its monthly decision on interest rates.
My prediction for this meeting is that it is likely to be a hold, implying the cash rate will stay at 2.75%. I see a low chance of a rate cut, and an even lower chance of a rate hike. In making predictions like these I think its informative to consider both the minutes of the previous meeting, and the data that has been released since that meeting.
The minutes of the previous month’s meeting (also a hold) were broadly neutral or somewhat positive, indicating the bank’s opinion that the previous easing cycle is beginning to take hold in the real economy. The June minutes note that in the previous month, the “appetite for borrowing in the household sector was picking up,” “the housing market generally appeared to be improving,” and “forward-looking indicators of labour demand were consistent with further moderate growth in employment.” The minutes generally give the impression of on-trend capital investment, and note that business investment and business sentiment levels have been at long-term averages or slightly below. The share market, particularly banking stocks, had fallen slightly, although the movement was not large.
The current level of the cash rate is close to historical lows, and the bank notes that following the previous cut of 25 basis points in May, “most lenders…lowered their standard variable housing rates,” and that as a result, “lending rates for most households and businesses [were] reaching or approaching historical lows.”
Over the past month economic indicators have been broadly in line with expectations, with no major deviations or surprises that would affect the bank’s assessment of the economy. The bank still seems to be in an easing cycle, as it explicitly noted in the June minutes that “the inflation outlook as currently assessed might provide some scope for further easing, should that be required to support demand.” This is the bank signposting that it is willing to engage in further easing if required.
Nevertheless, if the bank had been considering a rate cut for the upcoming meeting, the currency depreciation that has occurred in the meantime is likely to stay their hand. The AUD:USD has fallen from 0.97 to 0.92 over the last month – towards a level the bank will consider closer to a trend value. Such a currency move is essentially passive monetary easing, making a rate cut from the RBA at the next meeting unlikely.
As such, while the RBA has signposted that it is still committed to monetary easing if it is necessary to support demand, recent on-trend data-points from the real economy and a depreciating currency tip the scales in favour of a hold.
Over the next couple of days I will be surveying other members of the UQES Executive, as well as some of the academic staff at the University of Queensland School of Economics. Feel free to give us your opinion below!