Good morning.
The July RBA board meeting will be held tomorrow, Tuesday 6 July with firm expectations that the Reserve Bank will extend the pause in the current tightening phase. The current cash rate of 4.50%, established at the May 2010 meeting, was left unchanged at the June meeting and events in the past month have not provided reason to raise the cash rate above the existing neutral level.
Events since the June meeting.
Problems in European sovereign debt markets, and funding issues for many European banks, coupled with deficit reduction ambitions, have been an on-going primary focus for global markets in the past month.
As a consequence, European growth estimates continue on the soft side, and in the past month the FOMC have lowered US growth estimates in the period ahead, partly due to the issues in Europe.
Equity markets have again retreated in the past month, as another consequence of European issues, prompting sharp declines in bond yields for countries outside those with sovereign debt issues. The US 10 year bond yield is now trading below 3%, and US rate hikes are clearly off the agenda for the immediate future.
In the US, the S and P index has retreated for the second month in a row, and at the recent low at 1010, is down sharply from the April high at 1205.
The SP 200 index in Australia has also retreated from the April 2010 high at 5025, to last week's low at 4214 and close to the 'Flash Crash' low of 4175.
Softer equity markets and global growth downgrades look like keeping the RBA on the sidelines at the July 2010 meeting . This prospect is broadly anticipated and has remained firmly in money market pricing over the past month.
Issues going forward.
The RBA has remained vigilant to inflationary pressures and was purposeful in last month's statement in reminding markets that "Inflation appears likely to be in the upper half of the target zone over the next year. http://www.rba.gov.au/media-releases/2010/mr-10-11.html
On July 28 the 2nd Q CPI will be released and there has been some view that a high side outcome, say 0.8 % for the preferred underlying measure, would prompt the RBA to resume their tightening , and raise rates by 0.25% to 4.75% at the August 2010 meeting. However, the case for another rate hike in August in no longer clear cut, even with a high side inflation reading this month.
Weaker equity markets, have dented consumer confidence around the globe, and the downgrades to global growth, particular in the US, will lead the RBA to pause in July and most likely again in August.
And rate cuts are not a serious prospect.
What goes up must come down is not the case with RBA cash rate prospects, at least for the considerable future ahead. Some futures contracts contain a very small pricing content, that suggest this prospect, but that is just a factor of risk being taken off the table, rather than a view that RBA rate cuts could occur in 2010.
Of course, you can never say never, but for the RBA to move to reduce the cash target rate, there would have to be a return to a global recessionary situation, rather than concerns for that occurring.
The Federal Election
The Federal election, will by all accounts, be announced in the next four weeks with a late August poll the favored outcome. Election timing has not phased Glenn Stevens in the past, but with so many uncertainties on the horizon, it may yet influence the RBA to complete a substantial pause period of three months in a row.
Kind regards,
