Reserve Bank of Australia still dovish

Australia’s central bank maintained rates at 3.0% in line with consensus market expectations. We previously explored some of the reasons why the Reserve Bank of Australia (RBA) would be forced into moving earlier than expected. None of these reasons seem to have been strong enough to prompt the RBA into another cut for now, but the statement indicates further cuts are still likely unless the economy picks up much more than expected.

The RBA said “The Board’s view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate. The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand.”

That leaves open the door for more cuts if 1) The rate of unemployment continues to rise, we think a print above 5.5% will prompt the RBA into urgency 2) A sluggish rate of economic growth together with an inflation read below the 2-3% range will again bring forward some urgency, particularly given the accommodative stance other central banks around the world have maintained. These two points are our main focus, other data is important, but just as the Fed has based its monetary policy on an unemployment rate target, we too think the RBA is worried about jobs more than inflation for the time being.

The timing issues we raised last week in our note titled “RBA rate decision next week – hold or cut” are still relevant today.

Market reaction – The AUDUSD slipped back below 1.04 following the announcement while the AUDJPY was last struggling to hold above 96. The market clearly sees more RBA cuts this year but the most important issue will be timing. Today’s meeting just buys the RBA more time. Any sudden shocks in Europe as seen last night could see further reversals in the AUD against both the USD and JPY. Commodity prices remain strong, but the rally in iron ore, coal and copper still look slightly fragile.