UBS expects the RBA will cut rates twice by the middle of next year

THOMAS OLIVA / AFP / Getty Images
  • UBS now sees the RBA cutting its cash rate twice by the middle of 2020, the first arriving on Melbourne Cup day this year.
  • Financial markets are now fully priced for a 25 basis point cut within the next 12 months.
  • The RBA has abandoned its long-held view that the next move in the cash rate was likely to be higher, prompted by lower expectations for GDP growth and inflation in the years ahead.

The form guide may not be the only thing financial markets are interested in on Melbourne Cup day this year.

If UBS are correct, it will be the day the RBA will cut rates.

“Given UBS see Australian GDP slowing to a below ‘trend’ pace of 2.3% year-on-year in 2019, and hence a likelihood of a softening of the labour market over the next year… and little inflation pressure, we now look for a 25 basis points (bp) cut in November 2019 and an additional 25bp cut in the first half of 2020,” says George Tharenou, economist at UBS

“This would lower the cash rate to a new record low of 1%.”

Previously UBS was forecasting that Australia’s cash rate would remain at 1.5% until at least the start of 2021, with risks slanted to the downside.

It follows a major shift from the RBA on Wednesday with Governor Philip Lowe abandoning its mild tightening bias, indicating that the next move in the cash rate was likely to be higher.

“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced,” Lowe said in a speech to the Australian Press Club in Sydney.

“In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point.

“We have the flexibility to do this if needed.”

Notably, the has RBA downgraded its entire inflation forecast profile, only seeing underlying inflation rising to 2.2% by the middle of 2021, a smaller and slower increase than was previously expected. That reflects an expectation that Australian GDP growth is unlikely to be as strong as the bank previously thought.

While the RBA believes the risks for the next in the cash rate are evenly balanced, financial markets strongly disagree, pricing in at least one and perhaps two 25 basis point rate cuts by the middle of next year.

Most economists are still forecasting that the next move in the RBA cash rate will be higher, albeit few expect that it would occur this year.

Given the shift in bias from the RBA on Wednesday, other forecasters may soon join UBS in calling for the next move in the cash rate to be lower.

Of the 28 economists polled by Bloomberg at the start of February, only AMP Capital, Market Economics and Capital Economics were forecasting that the cash rate would be lower by the end of 2019.

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