Insight: Australia Q1 GDP Not Enough to Spur RBA July Cut

• Published on
• 07 Jun 2019, 07:16 AM

By Sophia Rodrigues

--Weak Labor Force Data, Including Soft Employment May Bring July Cut On Table

--RBA Very Unlikely to Consider 50bps Cut in July

Australia’s first quarter GDP was only slightly softer than the Reserve Bank of Australia’s forecast, and doesn’t make enough case for a follow-up cash rate cut in July.

However, a weak labor force outcome could put a rate cut on the table if it shows a rise in the jobless rate and a fall in employed numbers.  The labor force data for May will be published by the Australian Bureau of Statistics on June 13.

Right now, the RBA is taking a lot of comfort from the rise in employed numbers which in April increased by a strong 28,400 m/m, leading to a 2.6% y/y rise. The continued strong growth means the RBA has still not resolved the tension between slowing economic growth on one hand and employment growth on the other.

But if this data point falters in the next report, the RBA may consider a rate cut in July, rather than waiting until August.

A rate cut in such a case would be restricted to 25bps.

A bigger 50bps cut is very unlikely. While there is some benefit of 50bps cut because it would push the Australian dollar lower in a shock reaction, the RBA would be mindful that it would also negatively hurt sentiment and raise question of whether the outcome on the economy has worsened drastically.

The RBA doesn’t believe it has and Governor Philip Lowe emphasized that in his speech after Tuesday’s board meeting.

“I want to emphasise that the decision is not in response to a deterioration in our economic outlook since the previous update was published in early May. The economic outlook remains reasonable, with the main downside risk being the international trade disputes, which have intensified recently,” Lowe said.

The Q1 GDP data released a day after the board meeting was slightly softer than expected but that hasn’t changed the RBA’s “reasonable” outlook on the economy.

RBA MIGHT THINK STRATEGICALLY

Strategically, a rate cut in July wouldn’t be a wise decision for the RBA because it would be using its ammunition very quickly.

This is because a cut in July would raise expectations for another cut in August because it is unlikely the RBA’s updated forecasts in August would improve versus May.

Pushing the cash rate to 0.75% by August may not be the plan the RBA has in mind, even though one can argue it never has a plan and any decision is taken month by month.

--Email: sophia@centralbankintel.com