Uncertainty over August rate cut despite NAB, Westpac and Commonwealth Bank confidence

Uncertainty has been cast over the RBA cutting the cash rate on August 6 follows publication of the minutes of the July monetary policy meeting, despite three of the four big banks pencilling in a 25 basis point cut next month.

The Australian dollar's depreciation, given added weight in the minutes, is expected to push up inflation and assist trade-exposed non-mining sectors making an August rate cut less likely.

Interest rate futures markets have reduced the probability of a rate cut from around 65% to 50% following the publication of the minutes, and in particurlar the final paragraph which mentions a higher inflation outlook following depreciation of the dollar.

But complicating the picture, the Australian dollar has risen strongly since publication of the minutes yesterday and is currently up more than 1 cent to 92.5 US cents.

HSBC chief economist Paul Bloxham says the currency and the RBA's interest rate outlook are “intertwined”.

"Slower than expected rebalancing may see the need for further policy stimulus from the RBA, but further weakness in the Australian dollar could obviate the need for further cuts," Bloxham says.

The major banks have played down, to an extent, the impact of the Australian dollar with Westpac, the Commonwealth Bank and NAB all pencilling in a rate cut next month.

ANZ is tipping November as the next likely movement down to a cash rate of 2.5%.

The Westpac economics team, led by chief economist Bill Evans, believes that the language being used in the minutes “is more about justifying the decision not to move in July despite further deterioration in the real economy rather than specifically providing guidance for future meetings”.

“The minutes show the exchange rate adjustment was a key factor in the decision and tend to confirm our view that the currency decline made July tactically unattractive for a rate move.

“A more downbeat assessment of domestic economic conditions in the July minutes and weak data releases since the meeting suggest the case for further easing to support demand has been strengthened,” says Westpac.

Westpac expects two further rate cuts – one in the December quarter and one in the March quarter - to take the cash rate to an expected terminal point of 2% in the current easing cycle.

Commonwealth Bank economist John Peters notes that the bias towards a rate cut is “somewhat more muted” than earlier in the year following the slide in the Australian dollar, but says that nothing in the minutes “makes us uncomfortable with our view that another RBA cash rate cut of 0.25% is coming most probably in August, after the second quarter CPI is released on July 24”.

NAB made its case for an August rate cut last week – bringing forward an earlier November decision after the bank's business conditions survey hit a four-year low.

The only outlier is ANZ with economist Justin Fabo highlighting expectations that a lower Australian dollar will stay the RBA’s hand with it appearing “relatively content to wait at least a little longer to gauge the effect of accommodative financial conditions on economic activity.

“Importantly, the RBA appears confident that the Australian dollar depreciation will be sustained and that the currency will fall further over time (but this is expected to be associated with lower terms of trade and weaker mining investment which will drag on growth),” he says.

“The minutes noted that the effect of lower interest rates was “apparent across a range of indicators” – mainly associated with the housing market to date – and that this process had further to run.

“Hence, even a low second quarter core CPI print of 0.3% to 0.4% quarter-on-quarter on 25 July is unlikely to be enough to tip the Bank into easing policy in early August.

“That said, near-term rates decisions are likely to be keenly debated as there appears to be little risk from easing policy modestly further.

“Indeed, it might help nudge the Australian dollar a little lower which would be beneficial in our view and seemingly from the RBA’s view.

“The (unknown) timing of the federal election complicates the outlook for monetary policy as the Bank will want to steer clear of the election (and can do so because it is not clearly “behind the curve” in terms of its policy settings).

“Overall, we maintain the view that the cash rate is still likely to be lowered at least modestly further later this year (we have a 25 basis point cut pencilled in for November)," says Fabo.