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RBA holds cash rate

The Reserve Bank of Australia has kept the cash rate on hold at 1.75 per cent after last week’s stronger GDP figures calmed fears about low inflation.

The RBA’s decision today comes after it cut the cash rate by 25 basis points last month.

The ASX RBA Rate Indicator has been pricing an above 90 per cent chance of ‘no change’ since the end of May. The ASX 30-Day Interbank Cash Rate Futures June 2016 contract was pricing in a 92 per cent chance of ‘no change’ to the RBA cash rate on Monday.

HSBC chief economist Paul Bloxham pointed to the “upside surprise” of last week’s first-quarter GDP figures, which grew by a stronger than expected 3.1 per cent year-on-year.

“The stronger GDP, combined with the signs of continued modest improvement in the labour market, are likely to keep the RBA from considering a cut in June or July,” Mr Bloxham said.

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Given that the “driving factor” behind last month’s cut in the official cash rate to 1.75 per cent was the “surprisingly weak” first-quarter CPI print, Mr Bloxham said the RBA will need to see the second-quarter CPI figures (due to be released in July) before it considers a further cut to 1.5 per cent.

Mr Bloxham said while HSBC’s ‘central case’ is an RBA cut to 1.5 per cent following the second-quarter CPI print, increasingly hawkish commentary from the US Federal Reserve is a risk to the bank’s forecast.

An improving US economy and a more aggressive Federal Reserve mean the US market is pricing in a 55 per cent likelihood of a Fed rate hike by July, he said.

“A key result of the more hawkish Fed has been a depreciation of the AUD, which has fallen from US$0.78 in mid-April to around US$0.72 recently,” Mr Bloxham said.

“We see the RBA on hold in June and July, and have a cut pencilled in for August, after the Q2 CPI. However, the risk to this view is that the RBA delivers less, not more, in our view.”

RBA holds cash rate
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