J.P. Morgan joins the RBA rate cut club

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Following the release of Australia’s weak Q4 GDP report, J.P. Morgan has seen enough — it now sees the Reserve Bank of Australia (RBA) cutting official interest rates this year.

“We are changing our view on the RBA and now look for a 25 basis point (bp) rate cut in July, followed by a further 25bp easing in August,” says Sally Auld, Chief Economist and Head of Australia and New Zealand Fixed Income and FX Strategy at J.P. Morgan.

Auld says there are three primary reasons behind the change of view:

First, today’s data suggest that the economy slowed sharply in the second half of 2018. This is significant because it lowers the starting point for the RBA’s growth forecasts, and implies that 2019 growth will be marked lower in the May Statement on Monetary Policy.

Second, there are reasons for the RBA not to be too tardy in its policy response. Core inflation is running at a 1.6% 6-month annualised rate. This would be an uncomfortable starting point for a cyclical growth slowdown, especially when the mandated target is 2-3% over time.

Third, partial data for January/February — although limited so far — look soft.

J.P. Morgan joins the ranks of Westpac, Capital Economics, Market Economics, AMP Capital, UBS and Nomura, among others, who now see the RBA cutting Australia’s cash rate this year.

Financial markets share this view, pricing in a 25 basis point reduction will occur before we start 2020.

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