3 May 2016
AUD: All roads heading towards RBA decision - Westpac
Sean Callow, Research Analyst at Westpac, suggests that the highlight of today’s calendar is the RBA decision, out at 2:30pm Syd/12:30pm Sing/HK.
Key Quotes
“Westpac expects rates to remain at 2.0% though markets and analysts are roughly divided 50/50 for a cut v steady hand. Market pricing for a 25bp cut jumped from around 10% to over 50% after the Q1 inflation report. Core CPI rose by just 1.5% y/y, down from 1.9% y/y in Q4 and well below the RBA’s target of 2-3%. Missing the target however is not about moving outside the range near term but staying outside over the medium term.
While Westpac expects the Bank will drop their 2016 core inflation forecast to 1.75% from 2.5%, its 2017 forecast should be revised to 2.25% from 2.5% in Feb. If, however, the ‘no policy change’ forecast for 2017 was instead 1.75% then there would be little choice but to cut rates.
It is crucial the Bank maintains its GDP growth forecast of 3.0% in 2017 – above trend of 2.75% and indicating some upward pressure on inflation from a tightening of the output gap including a strengthening labour market. There should also be some ongoing pass-through from the AUD. These forecasts will be released in Friday’s Statement on Monetary Policy.
A decision to reduce the cash rate today however should be accompanied by clear guidance of a further move and markets will move to price in a second cut. The downside risk for AUD/USD on a rate cut is probably larger (the low 0.75s) than the upside on a steady hand (say 0.7740/50, still a little below pre-CPI levels).”
Key Quotes
“Westpac expects rates to remain at 2.0% though markets and analysts are roughly divided 50/50 for a cut v steady hand. Market pricing for a 25bp cut jumped from around 10% to over 50% after the Q1 inflation report. Core CPI rose by just 1.5% y/y, down from 1.9% y/y in Q4 and well below the RBA’s target of 2-3%. Missing the target however is not about moving outside the range near term but staying outside over the medium term.
While Westpac expects the Bank will drop their 2016 core inflation forecast to 1.75% from 2.5%, its 2017 forecast should be revised to 2.25% from 2.5% in Feb. If, however, the ‘no policy change’ forecast for 2017 was instead 1.75% then there would be little choice but to cut rates.
It is crucial the Bank maintains its GDP growth forecast of 3.0% in 2017 – above trend of 2.75% and indicating some upward pressure on inflation from a tightening of the output gap including a strengthening labour market. There should also be some ongoing pass-through from the AUD. These forecasts will be released in Friday’s Statement on Monetary Policy.
A decision to reduce the cash rate today however should be accompanied by clear guidance of a further move and markets will move to price in a second cut. The downside risk for AUD/USD on a rate cut is probably larger (the low 0.75s) than the upside on a steady hand (say 0.7740/50, still a little below pre-CPI levels).”