GOLDMAN SACHS: Australia's Reserve Will Need To Cut Rates Further

The Reserve Bank of Australia leaving the cash rate unchanged at 3% yesterday was no surprise.

But there has been a rising expectation from many economists (see here and here) that the period of cuts could be over, and the RBA’s next move, when it comes, will be an increase.

After reviewing the RBA’s statement, Goldman Sachs disagrees.

The investment giant is predicting two rate cuts over the coming year – one in July, and another in November.

Here’s the key chart from the Australia Economic Update research note:


GS offers a range of justifications for its position, but critically their economic team believes growth in the non-mining sector will not sufficiently compensate for the passing of the resources peak.

The key excerpt:

…a number of business sector indicators (business conditions, job vacancies, PMI, business credit growth) continue to highlight that the compression of profitability and peaking in activity in the mining sector still represent a headwind to growth. Additionally, we highlight that mere improvement in the currently subdued non- mining activity indicators is no longer enough. We are fast approaching the time that non- mining growth will need to accelerate to an above-trend pace to keep the aggregate economy on an even keel as mining recedes. We continue to believe further easing will be necessary to achieve this.

The GS team also notes some subtle changes in the language used in yesterday’s statement by RBA governor Glenn Stevens:

  • While progress in Europe had previously been framed somewhat positively, “the Reserve simply stated the reality that ‘Europe remains in recession’.”
  • The peak in resource investment is “drawing close” rather than “approaching”.
  • Adding the phrase “thus far” to the characterisation of weak credit growth “may also indicate the RBA’s expectation that credit growth is set to accelerate”.

See the RBA statement here.

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