The chances that the next move in interest rates will be a cut have increased with a raft of news pointing to a moderation in the pace of economic growth, a renewed decline in commodity prices and a clear abatement in inflation pressures from the record low pace of wage growth and the stubbornly high Australian dollar.
While the most likely outcome for monetary policy in the next little while is the RBA holding interest rates steady, another lowish inflation result next month (low being 0.5 per cent or less) would signal a moderation in inflation from the quite worrisome lift evident through to the end of 2013. Indeed, a 0.5 per cent rise in the CPI would see inflation on track to fall to the bottom half of the RBA’s 2 to 3 per cent band by the end of 2014.
Such an inflation pull-back fits with very recent news of less robust economic growth since the stellar 3.5 per cent annual GDP result in the March quarter. While it is early days yet, the partial indicators for retail spending, building approvals, employment, job advertisements and business investment have all taken a step lower.
Indeed, GDP growth in the June quarter looks like coming in under 0.5 per cent, perhaps as low as 0.3 per cent, which would set a low platform for growth as the new financial year kicks off.
Complicating matters for the RBA is a difficult read on global conditions. While the current news flowing from the drivers of global growth are positive, there has been a less positive tint to that news particularly in the Eurozone where near zero or even negative interest rates are now in place to try to boost activity. There remains a huge uncertainty over the pace of expansion in China while the US growth rate is generally positive, notwithstanding the shock data for the first quarter.
The other element of the monetary policy puzzle of note are asset prices. The ASX has registered net zero growth since October 2013, having lifted an ultra impressive 25 per cent over the prior 18 months. House price growth may be moderating which is imposing a potentially less confidence inspiring wealth effect for consumers.
It also needs to be noted that public demand which is driven by the budget settings of the Commonwealth and State governments, will be adding only a little to GDP, notwithstanding the lift in infrastructure spending. Spending cuts elsewhere are significant.
All up, it is a scenario when GDP growth is set to dip below 3 per cent by the end of 2014 and as a result be back below trend.
The current call is no change for interest rates from the RBA in the near term. The economy is doing reasonably well. But any further loss of momentum in housing, employment, consumer spending, commodity prices and if the Aussie dollar stays stubbornly high, the case for the RBA cutting interest rates will be strong.