Global Easing Could Start in Australia as Odds of Rate Cut Grow
For the first time since Philip Lowe took the helm of Australia’s central bank in September 2016 there’s a real chance he may cut interest rates, making him the first in the developed world to do so this cycle.
Economists and markets are both split on whether the Reserve Bank will cut at Tuesday’s meeting, with the highest odds for a move since before the last easing in August 2016. While subdued prices make it tough for the inflation-targeting Reserve Bank to resist action, an election in less than two weeks might encourage policy makers to hold off until June.
“It’s a close call,” said Tom Kennedy, an economist in Sydney at JPMorgan Chase & Co. “The deterioration in core inflation, in our view, warrants a more immediate policy response.”
Kennedy is one of 15 economists surveyed by Bloomberg who expect the cash rate to be cut to a record-low 1.25 percent on Tuesday, while the other 14 are either on hold or expect the RBA to wait until later in the year.
Australia’s three-year bond yield fell below 1.25 percent Monday as the revival of trade war fears further boosted the chances of a cut by giving central banks even more reason to turn dovish. It’s now more than 25 basis points under the RBA benchmark for the first time since Aug. 2, 2016 -- the day Australian policy makers last eased.
A reduction would be a rapid reversal for Lowe. In December he was predicting the next move would be the first tightening since 2010; by February, he was saying risks between a hike and a cut were evenly balanced. What changed was a sharp slowdown in growth in the second half of last year, a pattern replicated in a number of developed economies. But what continues to confound policy makers is that this is all occurring while hiring remains strong.
And it’s not just developed economies being forced to consider easing. The Reserve Bank of India lowered interest rates twice this year and the Philippines is expected to cut on Thursday. Most leading central banks are taking a breather or turning dovish again, with the U.S. Federal Reserve last week seeing no strong case for a move in either direction. New Zealand is expected to lower interest rates when its Reserve Bank meets Wednesday.
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Australia’s policy makers also have to factor in election promises. Both the government and opposition Labor Party -- which is leading in opinion polls -- are offering tax cuts and cash rebates that will eventually boost household finances. The question is how soon that stimulus will be distributed, given such measures need to be passed through a potentially hostile upper house.
The main doubt in Lowe’s mind is likely to be the jobs market: unemployment is low at 5 percent and employment growth has been consistently solid for two years. However, the RBA will likely have to trim its GDP and inflation forecasts in its quarterly update Friday due to those indicators’ weakness. Moreover, policy makers are guided by the outlook 12 to 18 months ahead.
While most observers maintain that the impact of monetary stimulus declines as the benchmark rate approaches zero, Lowe himself has pointed out that it puts more cash into the pockets of borrowers -- the vast majority hold mortgages that adjust with the cash rate -- and might put some downward pressure on the Aussie dollar.
It might also encourage more people into the property market and help put a floor under prices (Sydney housing prices are down 14.5 percent from a 2017 peak), improve consumer confidence and spur a bit more spending in the economy.
Worth noting is that senior RBA officials have mainly avoided delivering speeches during the election campaign, suggesting a determination to avoid the spotlight. Perhaps that signals a mindset that would rather wait until a new government is sworn in before altering the economy’s settings.
©2019 Bloomberg L.P.