UBS is forecasting another RBA interest rate cut in March

Reserve Bank Governor Glenn Stevens / File

Scott Haslem and the economics team at UBS have pulled forward their forecast for a second rate cut this year to March, based on the RBA’s rationale for its decision to cut the official cash rate to a record low 2.25% today.

UBS says that the central bank’s decision, which surprised most economists today, “suggests the RBA may have taken the view that global forces have intensified sufficiently to justify lowering the cash rate sooner rather than later. This would be to counter the recent falls in commodity prices, likely weaker near-term growth and to protect the AUD’s recent move lower from the threat of renewed capital inflows as oil drives global inflation and yields lower.”

Australian interest rates may be at record lows but they are still high compared to most developed economies, especially Japan, the US and Europe. Soc Gen also noted this potential impact of keeping rates on hold today – that it could trigger a very strong rally in the Australian dollar and so the currency would fail to continue delivering stimulus to the economy through more competitive exports.

UBS thinks that once the RBA hits 2%, they’ll stop. “This is because the easing of financial conditions from the combined impact of 50bp of rate cuts in 1H15 and an AUD that’s likely to continue lower toward our USD0.75 forecast, is likely to be sufficient for the RBA to stop cutting at 2%, given ongoing signs of improved consumer & housing growth, and our forecast for some steadying in global growth in 2H15.”

Now read: The RBA has cut interest rates because it thinks the economy has weakened

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