RBA likely to cut by 25bp on Tuesday owing to recent weakness in employment figures, says ANZ Research

The Reserve Bank of Australia (RBA) is expected to cut by 25bp at its monetary policy meeting on Tuesday, taking the cash rate down to 0.75 percent, primarily owing to the recent weakness in employment data, according to the latest report from ANZ Research. The decline in private sector job vacancies is accelerating and now dragging down the overall level of vacancies.

It is doubtful whether the public sector can maintain its recent pace of job creation, suggesting that a sharp slowdown in employment growth lies ahead. At the same time the pace of central bank easing globally is picking up. If the RBA disappoints a market that is around 75 percent priced for a move next week then the AUD may well spike – something that the RBA will regard as undesirable.

The Governor hasn’t been quite as explicit in signalling an easing at the upcoming meeting as he was ahead of the June Board meeting. So it is possible the RBA prefers to wait for more data before it moves. Retail sales for August feature in the week ahead.

The market is pricing around a 75 percent chance of such a move compared with 100 percent pricing of a 25bp rate cut on the Friday before the RBA’s June meeting.

The difference reflects the fact that in his last speech prior to the June Board meeting Governor Lowe said: “At our meeting in two weeks’ time, we will consider the case for lower interest rates”. Lowe has not been as explicit this time, saying in his speech on Tuesday:

"At our Board meeting next week, we will again take stock of the evidence...[and] the Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, make further progress towards full employment, and achieve the inflation target over time."

The RBA might want to see how August retail sales, in particular, went in order to gain a better appreciation of the impact of the tax cuts on consumer spending. Unfortunately, this is not released until October 4 – three days after the RBA decision.

"We expect a 0.7 percent increase to retail spending in August 2019, a substantial upgrade from recent months where growth has been about 0.2 percent per month on average and a big bounce from the disappointing July result. This is thanks to lower interest rates and the payment of tax cuts for the 2018-19 tax year, which provide low and middle income earners with up to $1,080 extra income at the end of the tax year," ANZ Research commented further in the report.