Next RBA rate cut could be as early as July after inflation forecast revision: Bill Evans

Lower RBA inflation forecasting has prompted Bill Evans, the Westpac chief economist, to conclude today’s RBA statement of monetary policy (SoMP) makes the prospect of earlier rates cuts than he’d anticipated.

“The case for another rate cut has already been made, and every board meeting through the course of this year must be seen to be very much alive,” Evans says.

“We had expected that the 50 bp cut would be in two tranches in August and November.

“This RBA statement now indicates to us that these cuts can be expected earlier by the end of the September quarter, being concentrated in that July–September window.”

Savanth Sebastian, an economist at CommSec noted the door had been left open for further rate cuts with CommSec pencilling in a quarter per cent rate cut in August.

"However the focus on inflation has now shifted from prices to cost pressures," Savanth Sebastian noted adding that subdued wage costs and/or an improvement in productivity will ensure that the Reserve Bank has scope to comfortably cut rates further in coming months, if it is deemed necessary to stimulate activity.

Evans says the monetary policy statements make it quite clear that the case for another rate cut has already been made.

“In the February SoMP the Bank forecast underlying inflation in the year to December 2012 at 2.5%.

“That has now been reduced to 2%.

“Forecasts to December 2013 appear to be broadly unchanged with 2.5% being replaced by 2–3%.

“The forecast for June 2014 has been reduced from 2.5–3% to 2–3%.

“We find these forecast revisions significant since it is very rare that a central bank would forecast inflation at the bottom of the band over the course of the current year.

“On our figuring the bank is assuming a print for underlying inflation in the second quarter of 0.7% falling to an average of 0.5% in the third and fourth quarters.

“The other significant development is that there is no longer concern that inflation will necessarily reach the top half of the 2 to 3% band in the year to June 2014.”

“The bank’s decision to forecast that underlying inflation (excluding carbon price) will remain at the bottom of the 2 to 3% band over the course of 2012 is a very strong signal that it retains an easing bias.

“Since 2005 when the Bank began producing inflation and growth forecasts there have only been two SoMPs when it has forecast inflation to be at the bottom or below the band over the next year or so.

“That was in May and August 2009 in the aftermath of the global financial crisis,” Evans says.

“Admittedly, the cash rate had bottomed out by then but cuts totalling 425bps had been rapidly delivered as the economy lost momentum.

“In this current episode the bank's growth forecasts are more upbeat but in recognising that inflation will remain at the bottom of the band (despite trend growth) the signal is clear that there is ample scope for further monetary easing,” Evans says.