Steve Campbell: RBA passes rate cut surprise

What can investors expect following the Reserve Bank’s cash rate surprise? Pendal’s head of cash strategies STEVE CAMPBELL explains

• Find out about Pendal’s cash funds

THE Reserve Bank of Australia (RBA) surprised the market today by leaving the cash rate unchanged at 3.85%.

The market had priced in more than a 90% probability that the RBA would ease policy. Expectations for a cut had been set higher at the RBA’s previous meeting in May, where the case for a 50-basis point cut had been discussed.

Throw into the mix the weak first quarter economic growth data (+0.2% for the quarter and +1.3% for the year) and the set of conditions were seen as being in place for the RBA to ease.

At today’s meeting, however, the vote was 6-3 in favour of no change.

In justifying the decision not to move, the RBA noted that the monthly inflation was, at the margin, slightly stronger than expected and that 50 basis points in cuts have already been delivered.

This is buying the central bank time, with the Board noting it had “judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.”

The information that the RBA needs will come via second quarter inflation data to be released in late July.

On economic growth, despite the weak first quarter result, the RBA does see some cause for optimism.

Domestic demand picking up over the past six months, along with a rise in real household incomes, were cited. The labour market also remains tight.

Uncertainty around inflation and growth, however, remains elevated due largely to US trade policies that remain unresolved.

The RBA sees monetary policy settings as being well positioned to deal with the fall-out should economic growth deteriorate sharply or should inflation fall more quickly.

Leading into today’s decision, the market had priced the cash rate ending the year just above 3%. That has moved closer to 3.25%.

For August, it is priced that the RBA is more likely than not to cut policy. But as today’s decision shows, the market doesn’t always get it right.

At her previous press conference, RBA Governor Bullock was somewhat dismissive of the monthly inflation data series. Today that data series gave the RBA enough to remain on hold.

The quarterly data series still reigns supreme and all eyes will be on 30 July when it is released. If it comes in line with expectations, then it is likely that the RBA eases policy in August.

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About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about  Pendal’s cash funds:

Short Term Income Securities Fund
Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here