RBA rate cut expectations go into overdrive

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  • The Commonwealth Bank has become the last of Australia’s big four banks to forecast rate cuts from the RBA in the months ahead.
  • It expects the RBA to cut rates by 25 basis points in June and August. The cash rate hasn’t been reduced since August 2016.
  • CBA says there’s a “very low” probability that the RBA will cut the cash rate below 1%.
  • Financial markets are pricing in 50 basis points of rate cuts by November this year.

The Commonwealth Bank of Australia (CBA) says the Reserve Bank of Australia (RBA) will cut official interest rates, joining Westpac, ANZ and NAB, and almost every other forecaster, who already shared that view.

“We expect the RBA to cut the cash rate by 25 basis points to 1.25% on 4 June,” said Gareth Aird, senior economist at the CBA.

“A further rate cut looks probable and we think that it will most likely arrive at the August board meeting.”

Aird said the change in forecast follows the decision from RBA Governor Philip Lowe earlier Tuesday to introduce an explicit easing bias, implying the bank is likely to cut Australia’s cash rate for the first time since August 2016.

“The RBA are reluctant rate cutters. We have known that for some time,” Aird said.

“However, persistently below-target inflation, below-trend GDP growth and a slight rise in the unemployment rate mean that policy easing now looks imminent.”

Aird says that while the RBA will cut interest rates in June and August, he deems the probability of the cash rate going below 1% as “very low”.

In response to the RBA’s introduction of an easing bias, Westpac Bank has shifted forward the timing of when it expects the RBA to cut rates, now forecasting a 25 basis point reduction in both June and August.

Previously, Westpac saw the RBA delivering rate cuts in August and September. It was the first of Australia’s big four banks to forecast lower interest rates earlier this year.

Financial markets now put the probability of a 25 basis point rate cut next month at 90%. Looking further ahead, another 25 basis point reduction by November is deemed to be a certainty.

There’s also a small risk of a follow-up rate cut, taking the cash rate to 0.75%, being priced in by early 2020.

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