- Nomura has become the latest bank to forecast rate cuts from the RBA this year.
- It sees the bank delivering two 25 basis point cuts — the first in July and again in August — leaving the cash rate at 1%.
- Financial markets are fully priced for a 25 basis point cut by the middle of the next year, with a small chance of a second easing also factored in.
- The RBA will announce its March interest rate decision later today. Last month, it said the outlook for the next move in the cash rate was “more evenly balanced”.
The tide towards further rate cuts from the Reserve Bank of Australia (RBA) is continuing to turn.
Following the increasingly well-worn path of financial markets and growing number of forecasters before them, Nomura has become the latest to join the RBA rate cut club, predicting the bank will cut rates not once but twice before the year is out.
“We noted last month that the possibility of rate cuts has risen materially — that the situation was fluid and that it would not take much, in terms of disappointing growth data, for us to forecast rate cuts. Last week’s credit data and Monday’s Australian business indicators have pushed us over the edge,” says Andrew Ticehurst, Rates Strategist at Nomura.
“We think rate cuts this year, while not guaranteed, are now more likely than not.”
Based on the partial indicators received so far, Nomura is forecasting an incredibly weak performance for Australian Q4 GDP, suggesting an increase of just 0.1% is likely, a result, without revisions to prior data, that will see year-ended growth slow sharply, likely adding to downward pressure on inflation and upward pressure on unemployment.
“Our GDP forecast of 0.1%, after allowing for a 0.4% quarterly rise in hours worked and an estimated 0.4% rise in population growth, implies that both GDP per hour worked and GDP per capita went backwards in Q4,” Ticehurst says.
“This would represent a consecutive fall in GDP per capita, [meaning] the economy appears to have been in recession in the second half of 2018 if we choose to define that in GDP per capita terms.”
Given that backdrop, and continued weakness in Australian economic indicators in early 2019, Ticehurst says there is “little benefit in waiting too long” for the RBA to cut rates, forecasting the bank will deliver two 25 basis point rate cuts this year, the first in July and the second in August.
“We think of these rate cuts as helping to cushion growing downside risks,” he says.
“We also judge that, having shifted to a neutral stance from a tightening bias, the RBA has already made a significant move and recognised a material change in conditions and risks. The next move, to easing, may well come more easily.”
As for the potential triggers nominated by the RBA that could warrant additional monetary policy easing — a sustained increase in the unemployment rate and lack of progress in moving inflation back towards its 2-3% target — Ticehurst says it may not take much for the RBA to conclude that those outcomes could eventuate.
“We do not believe the RBA needs to see a sustained rise in the unemployment rate before acting,” he says.
“Circumstances which might lead it to reasonably conclude that the unemployment rate may rise — such as a sustained period of below trend growth — could well be sufficient.”
The RBA will announce its March interest rate decision later today.
While little risk of a cut is being priced, markets will be on alert for any signs that a change in policy bias, and rates, may soon be in the offering.
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