Further rate cuts from the RBA?

The Reserve Bank of Australia (RBA) retains its easing bias, but is keeping its options open. The minutes from the bank’s policy meeting earlier this month underpin a bank in wait-and-see mode. The RBA noted that the inflation outlook may provide scope for further easing, if needed to stimulate demand, adding that there are some signs of life in the Australian economy, partly due to the recent decline in the Australian dollar. Yet, the bank acknowledged that the tone of domestic data is mixed, partly due to falling export prices, resulting in below trend growth.

Offshore, sentiment also remains mixed but broadly unchanged since the board’s May meeting. There has been some disappointing data out of China of late (private sector manufacturing PMI is in contraction territory, exports and imports disappointed in May and China’s conference board leading index dropped to 0.3% m/m), intensifying concerns of a possible hard landing for the world’s second largest economy. Yet, the recent weakness in sentiment in China’s manufacturing sector can be partly attributable to measures aimed at cooling property prices in some of China’s major cities.

In saying that, there are numerous threats to Australia’s growth outlook, including a looming peak in mining investment. As we have explained previously, Australia’s transition away from mining investment threatens to leave a hole in GDP that other sectors of the economy cannot fill. We aren’t seeing a pick-up in the broader economy that can substitute for an anticipated peak in mining investment. Hence, it may be a bumpier transition period than the bank currently expects.

Furthermore, while a higher Australian dollar isn’t our base case, it would likely result in a more dovish RBA. In fact, one of the main factors keeping the RBA on the sidelines is the recent fall in the Aussie, and the prospect for further declines for that matter.

Source: Forex.com

18.06.2013