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News and discussions from Novus Capital

Financial markets are still betting on rate cuts this year

Gavan Farley - Wednesday, May 15, 2019


Financial markets are betting official interest rates will be cut in three months time, with the likelihood of another reduction later this year, despite the Reserve Bank indicating this week that the case for lower rates had not been made.

After the central bank left official interest rates on hold at a record low of 1.5 per cent on Tuesday, markets have slightly pared back expectations of rate cuts this year. But many remain convinced that the RBA will soon lower borrowing costs.

All eyes will be on the jobs data in the months ahead, especially the unemployment rate, amid debate over which figures best reflect the health of Australia's economy: the weak economic growth figures or the stronger labour market numbers.

On Wednesday, ANZ head of Australian economics, David Plank, said futures markets had "fully priced in" a 0.25 rate cut in August, and there was a "pretty high" chance of a second cut of this size by the end of the year.

"The market went from pricing more than two [interest rate cuts], to a bit less than two, by early next year," said Mr Plank, who also expects rates will fall this year.

National Australia Bank chief economist Alan Oster said a key reason why rates had been left on hold this month, despite very weak inflation and two quarters of soft economic growth, was that the RBA had more faith in the monthly employment data than the numbers on gross domestic product. Latest ABS figures showed an unemployment rate of 5 per cent in March.

When the RBA left rates unchanged on Tuesday, Governor Philip Lowe highlighted the importance of jobs data, saying further "improvement in the labour market" would probably be needed to get inflation — which was just 1.3 per cent in the year to March — back inside its 2 to 3 per cent target range.

Mr Oster, who is forecasting a cut in July, said if the unemployment rate rose for a few months in a row, that would probably be enough to trigger an interest rate cut.

"The unemployment rate is critical. If it starts going north, that's a problem," Mr Oster said.

Mr Oster argued the labour market was weaker than the 5 per cent rate of unemployment would suggest, pointing to the high proportion of people who would like more hours of work.

Among the big four banks, Westpac is also tipping further interest rate cuts this year, while Commonwealth Bank is currently forecasting no change.

Mr Plank said markets would be seeking greater clarity on the RBA's views on the state of the economy in the RBA's Statement on Monetary Policy this Friday, and a speech from Dr Lowe later this month.

Dr Lowe on Tuesday also noted a recent decline in bank funding costs, pointing out that even though some lending rates had declined, average mortgage rates were unchanged.

Mr Plank said that if any reduction in bank funding costs were passed on to variable rate borrowers it would be a "modest easing" from the perspective of the RBA, and was unlikely to meaningfully influence the outlook for employment or inflation.

There is also uncertainty over how long banks may take to lower their variable rates, if at all, and whether their funding costs will remain at current levels.

Source: The Sydney Morning Herald


Reserve Bank holds interest rate steady ahead of Federal election

Gavan Farley - Wednesday, May 15, 2019


The Reserve Bank of Australia has kept the official interest cash rate on hold for the 33rd consecutive month, just days ahead of the Federal election.

The rate will remain at 1.50 per cent, where it has sat since August 2016.

Reserve Bank Governor Philip Lowe said today's decision to extend Australia’s longest-ever period of steady monetary policy followed below-target inflation, steady employment growth and a nationwide housing downturn.

"The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting," he said in a statement.

"In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target.

"Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.

The announcement comes ahead of the Federal election on May 18.

Domain economist Trent Wiltshire said the RBA is “very likely” to cut rates twice in 2019, bringing the cash rate down to a new record low of one per cent.

“The RBA has been reluctant to cut rates despite a slowing economy and weaker than expected inflation due to strong jobs growth and low unemployment," he said.

"But with such low inflation, the RBA has changed to an ‘easing bias’ and will cut rates in the next few months."

Mr Wiltshire said the lower interest rates will boost the housing market and slow further house price falls.

CoreLogic head of research Tim Lawless agreed that a rate cut was likely this year.

“If the cash rate does move lower later this year, a reduction in mortgage rates would provide some support for housing demand, however we may not see quite as much stimulus for housing market conditions that we have seen after previous rate cuts,” he said.

“Generally, housing sentiment remains low and borrower mortgage serviceability is still assessed based on mortgage rates of at least seven per cent.

“Households who already have a mortgage, or prospective borrowers who are able to satisfy lender credit policies will be the winners if interest rates do fall later this year.”

Many economists and analysts tipped a cut after last month's official data showed inflation slowed to zero in the March quarter.

But KPMG Australia chief economist Brendan Rynne was among those tipping the RBA to sit on its hands for a little longer.

Source: The 9 News