HSBC joins the RBA rate cut club

Irfan Khan/Los Angeles Times via Getty ImagesThe doves are taking flight.
  • HSBC, renowned as being one of the most hawkish interest rate forecasters in Australia, is now predicting that the RBA will cut rates.
  • It sees the RBA delivering a 25 basis point cut in June, and another in August. There may be even more depending on what happens with the trade war between the US and China.
  • The RBA’s next monetary policy decision will be delivered on June 4.

HSBC, one of the last remaining forecasters who thought the next move in Australia’s cash rate would be higher, is now predicting the RBA will cut official interest rates.

“Despite considerable reluctance to cut the cash rate, and a strong preference for a fiscal policy response, we now expect that the RBA will be forced to cut,” HSBC’s Chief Australia and New Zealand Economist Paul Bloxham wrote in a note on Thursday.

“With little reason to wait, we now expect the RBA to cut its cash rate in June by 25 basis points to 1.25%, and to cut again in August to 1.00%.”

The change of view was sparked by news that Australia’s unemployment rate unexpectedly rose to 5.2% in April, along with the recent escalation in trade tensions between the United States and China.

“For the RBA, its recent policy decision rule has been driven by its outlook for the jobs market,” Bloxham said.

“While the RBA has been able to argue that the jobs market is tightening, and that this will lift wages growth, and eventually inflation, the central bank has been prepared to hold its cash rate steady. This week’s labour market numbers make this expectation less credible.

“At the same time, the escalation in trade tensions is a tangible threat to the outlook for China’s growth.”

Beyond the two rate cuts he’s already forecasting, Bloxham said there be even more to come, noting “any further policy action could be highly affected by the way in which the [China and US] trade tensions evolve”.

Financial markets put the probability of a 25 basis point rate cut from the RBA in June at around 60%. By early next year, a full 50 basis points of cuts is priced in, a scenario that would leave Australia’s cash rate at 1%.

The RBA’s next monetary policy decision will be delivered on June 4.

Before that announcement, a speech from RBA Governor Philip Lowe on May 21 will likely indicate which way the board will go.

NOW READ: Markets see a RBA rate cut next month as more likely than not

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