MACQUARIE: Risks for multiple RBA rate cuts are growing

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Macquarie Bank researchers, as they have for some time now, have retained their view that the RBA will cut interest rates again when they next meet on November 3.

However, in what is now becoming a common theme from Australia’s investment banking community, they suggest that the risk of additional rate cuts from the RBA next year “has increased” as a result of recent events.

“We reiterate our forecast for subdued growth in 2016, and remain of the view that an additional rate cut and further AUD weakness is needed in order to rebalance the economy,” said the bank in a research note.

In what is a divergent view compared to that offered by the RBA, Macquarie believe that recent trends in the domestic labour market have continued to see additional slack accumulate. Combined with the impact of the depreciation in China’s exchange rate, something that may export deflationary forces to developed economies such as Australia through lower import prices, is likely to exert downward pressure on the RBA’s inflation outlook in the quarters ahead.

The chart below, supplied by Macquarie, shows how recent domestic labour market data suggests that the unemployment rate may continue to move higher in the year ahead, something that is in stark contrast to forecasts offered by the RBA in its most recent statement on monetary policy.

On the recent improvement in Australian consumer and business confidence, something that has coincided with Malcolm Turnbull replacing Tony Abbott as Australian prime minister, Macquarie suggests that it will need to be sustained, and accompanied by further Australian dollar weakness, in order to help rebalance the Australian economy further.

Like other banks have expressed over the past week, they also suggest Westpac’s out-of-cycle mortgage rate increase announced last week has increased the likelihood that the RBA will deliver a rate cut in November.

“We reiterate our forecast for a November RBA rate cut, followed by an extended pause,” said the bank.

“However, the risk of additional easing being required in 2016 has increased. Whether further easing is ultimately required depends on the adjustment of the AUD, which in part will be a reflection of the timing and extent of monetary policy divergence between the RBA and the US Federal Reserve.”

While Macquarie has stopped short of calling for two 25 basis point rate cuts from the RBA, its forecast is similar to that offered by other investment banks such as UBS, Goldman Sachs and Morgan Stanley who are all calling for additional monetary policy easing from the RBA in the months ahead.

Last week UBS changed its forecast for the RBA cash rate, suggesting that the bank is now likely to cut interest rates by 25 basis points – potentially as soon as November – following Westpac’s surprise decision to lift variable mortgage rates for its customers in November.

Goldman Sachs and Morgan Stanley have gone one step further, suggesting that the RBA will cut interest rates twice in in the quarters ahead, taking the cash rate down to just 1.50%. While ANZ shares this view, CBA, Westpac and NAB – three of Australia’s big four banks – continue to suggest that the next move in Australian interest rates will be higher, not lower.

In early Tuesday morning trade, Australian cash rate futures put the odds of a 25 basis point rate cut from the RBA in November at 38%.

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