Fundamental Macro

As I expected, the RBA held steady overnight, disappointing the market and the majority of economists on the street. However, the accompanying statement – while little changed in substance from February – gave a fairly clear steer that further easing is likely. The key final section says:

“At today’s meeting the Board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.”

As such, the market pricing for the terminal rate is actually little changed on this decision, with a further 50bps in cuts priced in by Q4 (with around a 50% chance of a 25bp cut in April and a full cut priced by May).

I expect that they will likely cut again in April or May. I have a slight bias for May, as it comes after the next CPI print and is alongside the SoMP. I’m less sure that they will cut twice more. Real rates are already at historical lows, and with core inflation expected to be around 2%, would be well into negative territory on the back of two cuts.

The other thing worth mentioning from the minutes is the comment on the AUD. The RBA view remains unchanged – they would like to see Aussie lower, and more in line with ‘fair value’, to help with the rebalancing of the economy. That means a move down to around 75c or even lower I think. I doubt that the small move up in AUD today following the rates decision will stick.

Finally, it is worth noting that Q4 GDP is out tomorrow, with something in the range of 0.4-0.7% qoq expected. But important to remember that around 0.7pp will come from net trade, such that domestic demand growth is likely to be negative again.