RBA Under Pressure To Cut Rates

Pressure is mounting on the Reserve Bank of Australia to cut interest rates in the wake of a gloomy report by the International Monetary Fund that forecasts falling growth for commodity exporters, including Australia.

The RBA board will meet next week to decide whether or not to cut the cash rate, now at 2 per cent, for the third time this calendar year.

While a rate cut on Tuesday would be unexpected, all meetings are “live” and economists say a move by the end of 2015 or in early 2016 is not out of the question. Several economists now believe there will be two rate cuts by the end of next year.

ANZ last week predicted there would be two more rate cuts to a record low of 1.5 per cent during 2016 because a lower dollar won’t be enough to lower the jobless rate.

The IMF’s latest World Economic Outlook warned that investment outside of mining was not picking up the slack left by persistent commodity price weakness.

According to its formula, growth rates in Australia could slip to 1.8 per cent over the next three years, from 2.8 per cent between 2012 and last year.

Capital Economics chief economist Paul Dales, who is forecasting rates will drop to 1.5 per cent, said concerns over the health of China’s economy and a fall in domestic equity prices were unlikely to prompt the RBA to cut the cash rate next week.

But rate cuts were coming later this year or early next year, he said.

Growth forecast likely to be curtailed

Mr Dales said in the coming months it would become clear the central bank’s growth forecast for 2016 was too optimistic.

“As such, we are sticking with our long-held view that interest rates will eventually fall to 1.5 per cent, with cuts coming back onto the agenda either later this year or early next year,” he said in a research note on Tuesday.

The market is pricing in a 27 per cent chance of a 25 basis point rate cut on Tuesday, according to Bloomberg.

David Bassanese, chief economist at exchange traded product provider BetaShares, said that given there was no sign of an impending fiscal stimulus plan coming out of Canberra, he said the RBA would need to cut the cash rate if the unemployment rate rises.

“It will have to be seen to be doing something,” said Mr Bassanese, who has forecast the cash rate to drop to 1.5 per cent by mid next year.

Falling cash rates and a lower dollar can encourage businesses to invest and hire, and helps exporters.

AMP Capital chief economist Shane Oliver said the RBA needed to act in November with a rate cut to 1.75 per cent and then follow with a further cut to 1.5 per cent by early next year.

“I think they need to cut again. Growth at 2 per cent is below trend so we’re still running the economy at well below potential. At the end of the day, the economy needs more help,” he said.

Not everyone believes rates will be cut

CommSec economist Savanth Sebastian said he did not believe the Reserve Bank would be cutting rates any further. He predicts rates will stay on hold for 2016 and the only direction for rates was up in early 2017.

“We don’t expect a rate cut next week. We think the Reserve Bank would be reluctant to cut rates from here,” he said.

“Another rate cut is really just pushing on a string in terms of the impact it will have on the economy. So unless you saw a significant downturn in the global economy it’s unlikely to see another move by the Reserve Bank this year.”

The US Federal Reserve left short term rates languishing near zero earlier this month due to risks of global weakening economic activity disrupting recovery in the domestic market.

A potential rate rise in the US later this year should put downward pressure on the Australian dollar – and potentially reduce the urgency for the RBA to lower rates – however the market has long anticipated the move.

Economist Saul Eslake remained unconvinced saying he didn’t think the RBA would cut rates at all either this year or next, saying the falling Australian dollar was helping the economy, especially tourism.

“They will hold fire for the rest of this year. Unless China falls in a hole I can’t see why the Reserve Bank see any need to cut rates. I really don’t think it will do any good,” he said.

Bankwest chief economist Alan Langford said while he expected the cash rate to remain at 2 per cent well into next year, a cut was not out of the question.

“If and when the Fed does physically go the Aussie dollar would come under pressure,” Mr Langford said.

“As for next Tuesday, they won’t have made up their minds yet, but all of the meetings are live now. I think it will remain on hold well into the second half of 2016, but if there’s going to be a rate change in the next six months it will be down.”

Mr Langford said that not withstanding moves by the prudential regulator to slow growth in the banks’ housing investor loan portfolios, an imminent rate cut could prove problematic.

“It’s a dilemma for the Reserve Bank. They don’t want to pour petrol on the Sydney and Melbourne house prices,” he said.

Australian financial Review

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell