These two factors are behind the ANZ's forecast that the RBA will cut rates to 1.5% in 2016

The RBA is going to cut rates twice again in 2016, taking the cash rate to a new all-time low of 1.5%, according ANZ chief economist Warren Hogan and his colleague, senior economist Justin Fabo.

They aren’t sure when the cuts will happen saying that “pinpointing the timing of the cuts is tricky,” but they’ve pencilled in February and May anyway.

Hogan and Fabo say that their call for rate cuts has been largely driven by two factors that mean “growth will not be sufficient over 2016 and 2017 to eat into spare capacity in the economy. Hence, extra policy support will be needed.”

The first factor driving the expectation Hogan and Favo say is “we recently downgraded our global growth forecasts to ‘more of the same’ from previously expecting a modest pick-up.” That’s on the back of a softer profile for emerging markets and a lack of traction for global growth.

They also imply the mild currency war and “the fact that ‘everyone’ has wanted a lower currency,” is telling, and suggests the risk for Australia’s trade partners is skewed to the downside.

The second factor driving their call for lower rates is the “waning support to non-mining growth from housing market activity and the sharply lower AUD next year.”

“Robust housing market activity, largely in Sydney and Melbourne, has supported growth via strong housing construction and positive effects on consumer spending (directly on household goods and indirectly through ‘wealth effects’),” Hogan and Fabo say. But, they believe the peak is close. That means Hogan and Fabo, “expect dwelling construction to remain at a high level, particularly in Sydney, the impetus to growth will wane”.

They also believe that because of the actions of APRA and warnings from the RBA, “cooler housing markets in Sydney and Melbourne, particularly investor activity, would remove a clear hurdle for the Bank to cut rates further.”

A slower economy and RBA rate cuts are likely to bias the Aussie dollar lower. but Hogan and Fabo say that the economy is now suffering what economists call diminishing returns from further falls. That means “the impetus to overall growth from the currency is expected to diminish.”

The result is that Australia’s economic growth won’t be strong enough to eat into spare capacity and send the unemployment rate lower.

So, they say, the RBA will have to cut rates.

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