PATH OF LEAST REGRET: Macquarie says it's time for the RBA to cut rates

Bob Chamberlin/Los Angeles Times via Getty ImagesThe RBA has reached a fork in the road.
  • The trickle of forecasters calling for rate cuts has turned into a raging torrent.
  • Following Australia’s weak Q4 GDP report, J.P. Morgan and Macquarie Bank are now both calling for rate cuts this year.
  • “We cannot see what the downside risks are to easing policy further,” Macquarie said.
  • Financial markets are fully priced for a 25 basis point cut to be delivered by the end of this year.

Stephen Koukoulas of Market Economics was the first mainstream forecaster who was game enough to call for rate cuts from the RBA this year.

Since he made that controversial call at the time, there’s been a steady trickle of market economists who have joined him, along with financial markets.

Now that trickle has turned into a raging torrent of dovish rate calls, courtesy of Australia’s weak Q4 GDP report.

Hot on the heels of J.P. Morgan changing its cash rate forecast, Macquarie Bank has also joined the party, calling for 50 basis points of rate cuts before the year is out.

“Picking the timing of rate cuts is a little tricky. If the Bank sticks with Statement months to change policy then May or August is our best bet for the initial easing,” said Ric Deverell and Justin Fabo, Economists at Macquarie.

“A May cut may be too soon if the Bank feels it wants more clarity on the data flow — particularly the labour market — and it would be just prior to the federal election, though we aren’t sure that would be a relevant issue for the Bank.”

As for the reason behind the change of view, the pair said the RBA has little to lose from cutting rates again.

“The main catalyst for the change of view is that we cannot see what the downside risks are to easing policy further. Take the path of least regret,” they said.

“Importantly, we are strongly not of the view that central banks should ‘keep their powder dry’ in case growth turns out to be weaker down the track.

“If additional policy support is necessary then it should be provided — best to provide it early than have to take more drastic action if growth actually turns down sharply.

Deverall and Fabo also argue against the notion that rate cuts won’t help to stimulate the economy as they have done in the past.

“We also do not support the view that cutting the cash rate from here would provide little economic support,” they said.

“Cash rate cuts would be substantially passed through to actual lending rates — including those on existing loans — in our view.

“If they aren’t, the Bank can cut by more. The Australian dollar would also be lower.”

Along with support from traditional monetary policy, Macquarie says there are more mechanisms available to policymakers to help shore-up the economy.

“In the event of a sharper downturn, Australia retains ample fiscal ammunition to respond and unconventional policy tools — including QE — are also available,” they said.

Along with Market Economics and J.P. Morgan, other notable forecasters currently calling for rate cuts this year include Westpac, UBS, Nomura and Capital Economics.

Financial markets are already fully priced for one 25 basis point rate cut to be delivered by the end of the year.

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