Interest rates will drop 0.5% in the first half of next year according to the ANZ Bank.
A shift in the balance of risks in Australia has prompted the Bank to forecast that the RBA will ease rates twice more, in the first half of 2016.
Their economic update today said:
We now expect the RBA to cut the cash rate by a further 50bps next year, taking the cash rate to 1.50%.
Pinpointing the timing of the cuts is tricky, but we are pencilling in 25bp cuts in February and May at this stage.
Since the RBA cut the cash rate by 50bps earlier this year, we have consistently characterised the risks as being towards further monetary policy easing at some stage.
We are now making that our central case.
The change of view has largely been driven by two factors:
And our judgement that growth will not be sufficient over 2016 and 2017 to eat into spare capacity in the economy. Hence, extra policy support will be needed.
1. First, we recently downgraded our global growth forecasts to ‘more of the same’ from previously expecting a modest pick-up.
The downgrade reflects a softer profile for EM growth. Gaining traction in global growth has remained difficult despite very accommodative monetary policy globally.
The fact that ‘everyone’ has wanted a lower currency is telling in our view.
Risks to growth in Australia’s major trading partners in Asia, and Australia’s terms of trade, are skewed to the downside, with China in particular facing several significant challenges.
2. Secondly, while current momentum in Australia’s non-mining economy is sufficient to keep the RBA ‘content’ this year, we see waning support to non-mining growth from housing market activity and the sharply lower AUD next year.
Governor Stevens has previously noted that growth in the non-mining economy needs to be above average for a couple of years to eat into spare capacity – at best it is currently around average with little prospect of improving much in our view.
At the same time, mining investment has much further to fall.
With this backdrop, it is difficult to see how inroads can be made into an elevated unemployment rate.
Even an expected unchanged jobless rate for two years – as currently forecast by the RBA – would ultimately be very uncomfortable for a central bank, especially if asset prices are flat and domestic interest rates are above global levels.
The economic backdrop we have outlined above points to greater risk that unemployment worsens rather than improves over the next 12-24 months.
Governor Stevens’ ‘path of least regret’ suggests he will need to cut rates again.
Where could we be wrong?
- A large China stimulus, but this would represent just a delay and could eventually make things worse if it furthers inflates imbalances in their economy.
- Momentum in the non-mining economy persists for longer than we expect. We actually expect most domestic activity indicators to remain relatively solid over the next few months; it’s next year where we see things softening.
Source: ABS, RBA, ANZ Research
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