August RBA rate cut now less likely

The probability of a rate cut by RBA has become less probable now than previously thought given that confidence has held up in the face of heightened uncertainty. GDP is growing solidly, while non-mining activity continues to pick up. The Australian front end has removed some of the recent rate cut pricing after positive business confidence data and the sentiment move in global markets.

"We expect a rate cut given persistently low underlying inflation, a slowing in the labour market, the risk posed by a potential downgrade to Australia’s credit rating and some pressure from a rising exchange rate," said ANZ in a research note.

The second quarter inflation will be a key input into the August rate cut decision. Australia's Q2 CPI (consumer price inflation) is due on July 27 and the RBA expects that inflation will remain below the two to three percent target band for an extended period. Also, the labour market has continued to cool, with unemployment steady at about 5.7 to 5.8 percent for almost all this year, which points to a rate cut.

Surprisingly, though, confidence has held up better than expected given increased uncertainty.  Despite 'Brexit' volatility and election concerns, the Index fell by only three percent, back to its level of March 2016 and still is 4.2 percent above its April level, which is encouraging. This suggests that there is less pressure on the RBA to cut rates to shield the broader economy than initially thought.

The RBA reinstated an easing bias in July meeting, the minutes of which will be released next week. Minutes likely to show RBA was concerned about the spike in market volatility following Brexit, as well uncertainty stemming from the-then risk of a hung parliament.

"An August rate cut by RBA is less likely than we had thought. While we think that the RBA will play down the macro linkages between the UK and Australia, it should be cautious about possible financial and confidence spillovers," adds ANZ.