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Category: Economic Trends / Money and Monetary Policy / Business, Economics and Finance / Budget / Currency

RBA likely to follow up with another cut: analysts

Tuesday, 3 May 2016 16:06:54 | Stephen Letts

Economists say that if inflation rates fall again, rates may continue to drop. (Alan Porritt, file photo: AAP)

Just where to now for the RBA after they put official cash rates into uncharted territory at 1.75 per cent?

Key points:

Most economists believe another interest rate will come in August after inflation data is released
Rates may even drop below 1.5 per cent if inflation expectations fall again
Changes in interest rates are rare, but not unprecedented in the lead up to elections

The RBA provided no formal guidance in its statement, but that does not mean the easing cycle is over.

Indeed far from it.

The majority of market economists surveyed now believe the RBA will follow up with another cut in August, after the next quarterly inflation data is released.

ANZ's Felicity Emmett said this is unlikely to be a "one and done" cut.

"The RBA nearly always follows up with another cut and we expect this time to be no different," Ms Emmett said.

Paul Dales from Capital Economics said the RBA's move will help solve the economy's twin problems of too-slow growth and too-low underlying inflation.

"The RBA cut rates not just because underlying inflation has been low, but because the weaker economic outlook and stronger dollar means that it will remain low this year and next," Mr Dales said.

"With underlying inflation currently 1 percentage point below the mid-point of the 2-3 per cent target range, it is very unlikely that the bank will conclude that one rate cut will do the job.

"We expect that rates will be cut to 1.5 per cent at the August meeting, especially if the release of the CPI data for the second quarter the week before show that underlying inflation stayed low."

But Mr Dales noted that still may not be the end of it.

He said if inflation expectations fall again, as they have done in New Zealand, then rates may drop below 1.5 per cent.

External Link: RBA official cash rate 1990-2016

Interest rate movements are 'like cockroaches'

AMP's Shane Oliver said he also expected another rate cut, probably at the August meeting.

"Interest rate moves are a bit like cockroaches — if you see one there is usually another one lurking nearby," Dr Oliver said.

"So given the downside risks to inflation, the upside risks to growth from a loss of momentum in housing construction and the upside risks to the Australian dollar, if the Fed continues to delay rate hikes our view is that there is likely to be another rate cut."

UBS economist Scott Haslem supports the view that another cut will be made in August.

"Given our view that that structural disinflationary forces have likely intensified in Australia, and the RBA's revealed concern about the risk of persistent low inflation, we now look for a follow-up 25-basis-point-cut to 1.5 per cent in August, after the second quarter CPI data," Mr Haslem argued.

"Thereafter, we expect the cash rate to remain unchanged until at least end of 2017."

Pre-election changes rare, not unprecedented

Changes in interest rate are rare, but not unprecedented in the lead up to elections.

The RBA famously moved in the last days of the 2007 election before the Howard government fell.

While the Turnbull Government will no doubt be happier that the RBA cut rather than raised rates this time, it does not mask the fact the move was driven by fears about deflation and weak domestic demand.

The RBA statement indicated that not only would inflation forecasts be moved down, but economic growth could be trimmed as well.

"Indications are that growth is continuing in 2016, though probably at a more moderate pace... [while] labour market indicators have been more mixed of late," Mr Stevens said.

Citi's Paul Brennan noted the line about labour conditions was significant.

"This is a downshift from the view in March that discussed 'improved labour market conditions' and a glass-half-full assessment from the April statement," Mr Brennan said.

Graph showing a tumble for the Australian dollar after news of an RBA cut.

Infographic: Australian dollar tumbles on news of RBA cut. (Supplied)

Banks bounce on the news

The cut also helped support the banks' share prices.

Despite another weak result from ANZ this morning, share prices rose steadily through the day and surged again in the afternoon once the announcement was released.

ANZ rose 5.6 per cent, while the NAB, CBA and Westpac all enjoyed solid bounces, up 3.8, 3.7 and 2.4 per cent respectively.

2MG Asset Management's Mike Mangan said it was "funny how all the banks tumbled yesterday on a poor WBC result, yet this morning after an even worse ANZ result, all the banks start rallying".

"And wouldn't you know it, four hours later, there's an interest rate cut to relieve their pressure," Mr Mangan said.

"Market gods once again shining brightly, pure coincidence I'm sure."

The interest rate does not necessarily make banks more profitable, but it makes their yields even more attractive compared to the rates they offer deposit holders.

The move supported strong rises for a number of high dividend stocks including Medibank Private, APA and Transurban.

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