The cash rate to be held steady this month.
The June RBA board meeting will be held tomorrow, 1 June 2010, and the cash rate is expected to remain unchanged at 4.5%. This level has placed interest rates, faced by most borrowers, at around their average levels over the past decade, according to the minutes from the May RBA board meeting.
The minutes further disclosed that this rate would leave monetary policy "well placed for the present", given that there were some early signs that the level of the current rate structure was beginning to effect behavior, with retail sales and housing loans approvals falling noticeably.
In combination, they are very compelling words by the RBA. They hint that monetary policy can be held at current levels, allowing Board meetings to sit back and take into account forthcoming data, including inflation and take stock of other world events.
Data since the last meeting.
Data since the last board meeting has continued to be soft, with March retail sales, released on 6 May, two days after the May rate hike, posting a tepid rise of 0.3% against forecasts of 0.7%. Home loans for March, released on 12 May, fell 3.4% against forecasts of -3.0% and compared to an upwardly revised, and therefore greater, fall of 2% in the prior month.
Other data, since the May RBA board meeting included a -7.0% reading for the Westpac Consumer Confidence Index, and a 0.2% fall in the 1Q Capex data. The only good statistic was the employment data, where the survey suggested 33,700 jobs were created in April. However, the unemployment rate rose from 5.3% to 5.4%.
That is not a exactly a palate of economic data that requires higher rates, especially with rates at average levels, and the removal of emergency settings completed by the RBA over the past eight months.
On inflation watch.
As suggested previously, the RBA will now wait until at least August before contemplating another change in the official cash rate. August will allow Board members to consider the next set of inflation data, the 2Q 2010 inflation reading, scheduled for release on July 28.
A reading at the top end of the band, or a quarterly underlying reading of +0.8 or higher, will certainly stimulate the anti-inflation concerns of Board members at the August meeting, and although a high reading will not automatically provoke another rate hike, it would at the very minimum receive a stern warning.
If the RBA were to forgive a higher reading, it would be only because of the combination of other world events. It would certainly again raise the issue of monthly inflation data, which has been discussed without any resolve to date.
For these reasons a rate hike in both June and July are not considered a serious threat.
A rate cut is not a near term prospect.
Recent events in Europe, with the problems of Greece kick-starting new risk aversion, have produced intense volatility in most markets, and has provoked much discussion about a so-called double-dip in another worldwide recession.
Lessons from the GFC have assisted in early action and although outcomes in this regard are impossible to accurately to predict, there is sufficient re-emerging growth in the USA, Australia and parts of Asia, to remain confident that modest growth will prevail over the next two years.
The intense volatility, seen in the past month, has also produced some pricing in domestic interest rate futures that caused some loose talk about RBA rate cuts.
Rate cuts are not in serious contemplation by the RBA, but interest rate futures cannot escape risk aversion and as a consequence the broadly illiquid 30 day cash contact has seen some pricing that technically suggests RBA rate cuts.
Why and How some SFE futures contacts have shown RBA rate cut pricing.
To explain, the 30 day cash rate contract is a monthly futures contract that settles at each month-end at the arithmetical average of the announced RBA cash rate for the prior 30 or 31 days ( 28 days for Feb)
If the RBA, for example, leaves the cash rate at 4.50% in June as expected, the June 2010 contract will settle at 95.50 ( 100- 4.50%).
During May several of the 4Q 2010 contacts have risen, to the extent that they show pricing that has been very close to a 4.25% or a 0.25% rate cut by the RBA, in any of the last three months of 2010. For example the October 2010 contact will settle at 95.7097 IF the RBA cuts rates in October 2010 to 4.25%
(95.7097 is calculated as there would be 5 days at 4.50% and 26 days at 4.25%.)
The October contact reached a high 95.685 on 26 May, when the European crisis hit a new low.
Short covering in the 4Q 2010 contacts and risk aversion, were the reasons for this rate cut pricing to occur not a real view that rate cuts would occur. This view is supported by the low volumes that traded.
The RBA is on a neutral setting, with a tightening bias.
To conclude, in the past week the OECD released a report that suggested the RBA would raise rates 4 or 5 more times in the next twelve months, an influential New York subscription RBA rate watch adviser suggested that another rate rise was closer than current market expectations, and the leading newspaper journalist on the subject, Terry McCrann's latest opinion is "don't assume the RBA won't increase in July or later in the year," after he ruled out a June hike.
As one RBA watcher of the last 30 years or so, and a fishing colleague of mine, dryly commented after the RBA declared it has reached neutral: " Between now and the next eventual move by the RBA, the market, and the press will jump from rate hikes to rate cuts, with some frequency."
And so say all of us.
