Flash Notes-RBA Preview: Another Rate Cut Likely In March

At its February board meeting, the RBA joined many of its peers around the world, deciding to cut rates to 2.25%. The latestmove marked the lowest on record; in what was a clear signal that the RBA not only downgraded its inflation expectations butthat the RBA also had a weak assessment on the growth outlook for the economy in the year ahead. It revised down its GDPgrowth forecasts for 2015 by 0.25ppt to 1.75-2.75% and made its new forecasts conditional on a further 25bp cash rate cut.

    As we head into next week’s 3 March RBA meeting, we recognize that the Australian central bank is likely to cut its benchmarkpolicy cash target rate further. Domestic data have actually weakened in recent weeks. One of the major concerns hasbeen the pullback in employment growth and a jump in the unemployment rate. The country’s employment fell 12.2k inJanuary, with the jobless rate climbing to 6.4% from 6.1%, and RBA Governor Glenn Stevens has said that unemploymentwould peak higher than previously forecast. In addition, Q4 wage growth was the slowest in 17 years, and the Q4 capitalexpenditure survey was weak. Mining investment is expected to continue to be a significant drag on growth and non-mininginvestment is also expected to fall.

    Another reason for a further rate cut is that the RBA would clearly like the AUD to fall further. Interestingly, the AUD/USDhas actually appreciated a little since the last board meeting, despite the fact that the RBA had repeated that the currencyhad remained “above most estimates of its fundamental value”. Besides, Australian interest rates may be at record lows butthey are still high compared to most developed economies, especially Japan, the US and Europe. There is little doubt thatthe global economic outlook has deteriorated, and central bankers around the world are acting in a self-interested mannerto try to get their currencies lower and their economies moving.

    All of these factors imply that the 25bps cut in February is not sufficient. Of course, the RBA could clearly choose to staypat and leave rates on hold for another month or so to see if there are signs of improvement in the economy or to see ifthe housing market cools. However, we strongly believe that the RBA is more likely to deliver sooner, rather than later. Fornow, we look for one more rate cut to 2.00%, although the likelihood of further rate cuts in the pipelines remains high