We are changing our view about likely RBA cash rate moves taking account of the RBA’s decision to leave the cash rate unchanged at its early March policy meeting, and more particularly, the information in the statement accompanying the decision. We now forecast that the most likely trajectory for the cash rate is another 25bps cash rate cut to 2.00% at the early May policy and another 25bps cut to 1.75% at the August policy meeting. Beyond that, we see a lengthy pause through to August 2016 when we tentatively foresee the start of a cautious policy tightening phase although, much will depend at that stage on whether the economy is showing consistent signs of stronger economic growth.

The recent March policy decision was curious in that the RBA provided clear guidance that the weakly growing economy would need more monetary policy assistance, but decided to defer granting further assistance because it had cut the cash rate 25bps at its previous meeting in February. Normally, when the RBA makes a decision to start cutting the cash rate to prime economic activity, it delivers a quick series of cuts. The rationale is that if rate cuts are needed, it is best to get on with it in order to deliver a meaningful boost to lift household and business confidence and also, that they recognise that in the best of circumstances monetary policy only starts to work after a significant lag. Something appears to be different in the current rate cutting cycle causing the RBA to adopt an unusual pattern of rate cuts.

One element that is not different is the reason for cutting rates; the economy has been growing at sub-trend pace for some time and looks set to continue growing weakly for some time to come. Q4 2014 GDP rose by only 0.5% q-o-q, 2.5% y-o-y (around 3.2% y-o-y represents long-term trend growth), and real net national disposable income was very weak, up 0.5% y-o-y, implying a significant constraint on future domestic spending. There is building excess economic capacity, especially in the labour market where the unemployment rate has edged up to a decade high 6.4%, and annual wages growth at 2.5% y-o-y is the lowest in at least a generation. With a high level of certainty, inflation will stay within the RBA’s target band for the next year or two, even with the Australian dollar depreciating further.

It is also increasingly unlikely that Australia will be bailed out of its current extended patch of weak economic activity by a quick return to booming export commodity prices. Australia’s biggest commodity export market by far, China, has recently announced a reduced 7% economic growth target for 2015 and strong intentions to change its economic growth spots from manufacturer and shipper, to predominantly shopper and services provider – becoming a crusader against pollution in the process. Australia’s terms of trade – export prices relative to import prices – were down 10.8% y-o-y in Q4 2014 and look set to weaken much further through 2015 continuing to weigh heavily on growth in national income. Meanwhile, Australian mining companies are supplying more minerals into over-supplied markets and are trying to shore up profits by repeated rounds of cost-cutting. Mine closures are looming, notable in iron ore, and the run down in mining investment has barely begun. Much bigger investment spending cuts lie ahead as indicated in the Q4 private new capital expenditure survey released in late February.

The reason why the RBA is delaying the next cash rate cut would seem to lie with the one area of the economy that is performing comparatively well, housing activity. Indeed, in some regions such as Sydney and Melbourne, home buying activity is too strong feeding strongly rising house prices and increasingly high risk borrowing activity by investors in housing in particular. Falling interest rates seem to drive housing activity more directly and strongly than other parts of the economy. The RBA is in discussion with other regulators about so-called macro-prudential controls and if these eventuate it may mean that the RBA can use monetary policy more freely to assist the economy in general. In the meantime, it seems the RBA is taking a cautious approach to cutting rates, tying the cuts to key economic data and its revised quarterly economic forecasts.

Confirmation of very low inflation is likely to come with the release of the Q1 2015 CPI due in late April. The RBA also publishes its latest set of growth and inflation forecasts on the first Friday in May. The May policy meeting on the first Tuesday in May, therefore, looks a prime candidate to deliver the next 25bps cash rate cut, based on a key data reading and allowing within days a full rationale for the cut.

Moving more sedately on rate cuts than we had previously thought likely, also means that more rate cutting is likely to be needed to achieve any particular policy objective, hence the reason why we have added another 25bps cash rate cut to 1.75% at the August policy meeting (just after release of the Q2 CPI in late July and just ahead of the RBA’s revisions of its economic forecasts on the first Friday in August).

At this stage, we see 75bps of cash rate cuts spread between February and August as sufficient to help economic growth lift to trend in late 2015 and in 2016. The greater risk around our forecast is that more, rather than less rate cutting will be needed.