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BFCSA: Macquarie joins calls for interest rate cut house price uncertainty stall momentum in the ­nation’s economy.

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Macquarie joins calls for election campaign interest rate cut

The Australian 12:00am April 30, 2019

Perry Williams, David Rogers


Macquarie has joined a growing call for the Reserve Bank to cut interest rates ahead of the May 18 election as weak inflation, GDP growth and house price uncertainty stall momentum in the ­nation’s economy.

The consensus among economists and traders has rapidly shifted towards earlier interest rate cuts since the surprisingly low inflation data for the March quarter was released last week.

The bank’s chief economist, Ric Deverell, said momentum had shifted to a cut at the RBA’s May 7 meeting followed by a second cut in the cash rate in August.

“Governor (Philip) Lowe has talked about how he thinks wages and inflation are gradually moving back to more normal growth rates. And I think the CPI that came out last week was sufficiently weak that it brings into question whether that near-term path is actually happening,” Mr Deverell told The Australian ahead of the annual Macquarie Australia conference in Sydney today.

“Their view that inflation will move back to the band over the next year is frankly improbable.”

JPMorgan, RBC, ANZ, UBS, Capital Economics, Citi, TD ­Securities and Nomura now forecast a 25-basis-point cut in the ­official cash rate next month, while the market-implied chance of cut is about 50 per cent by May, 80 per cent by June and 100 per cent by July.

Two rate cuts to a 1 per cent cash rate are fully priced in by ­December.

Australia’s central bank will probably act to cut its GDP growth and inflation forecasts on May 10, according to Macquarie.

There would be “substantial forecast changes from the RBA both in terms of activity — GDP — but also inflation and I suspect on balance that’s enough to get them back to an easing mode,” Mr Deverell said. “Not only is inflation not stable, it’s actually slowed. It’s gone the wrong way, which is why I think they need to get back on the case.”

The prospect of a rate cut during a federal election campaign should have little bearing on the RBA’s thinking.

“(Former RBA governor) Glenn Stevens always used to say if it needs to be done it will be done. And I think the facts have changed with that quarterly inflation print, and the way to be truly apolitical is to ignore the election cycle,” Mr Deverell said. “They hiked in the 2007 election, they cut in the 2013 election. It has happened before and I don’t think it’s a major consideration for them.”

The rate cut reflects near-term uncertainty over the economy headlined by a 14 per cent slide in Sydney house prices and 7 per cent fall nationally, which Macquarie said fed into the uncertain picture for the RBA. “Even though there have been some early signs that the rate of contraction is slowing, in terms of the Hippocratic oath ‘do no harm’, it’s now time for the RBA to shore up activity rather than wait for when it might deteriorate,” the bank said.

While global headwinds in the past few months have muddied last year’s momentum, Macquarie said Chinese growth had re-emerged which, twinned with a strong US economy, would filter down to Australia over the balance of the year.

“While global growth is still very soft, green shoots are appearing — and, in particular, Chinese growth has clearly bounced. The stimulus they put through is clearly quite substantial,” Mr Deverell said. “Credit growth has bounced and fiscal policy has turned quite aggressively stimulatory. In all likelihood we will see a rebound in overall global growth in the next six months and that will support Australia.”

Westpac chief economist Bill Evans has said the RBA will wait in May but adopt a “clear easing bias” before cutting in August and November.

His prediction since February was predicated on the Reserve Bank lowering its economic growth forecasts at the May 7 meeting — ahead of more detailed forecasts in its quarterly Statement on Monetary Policy — to “trend” growth for 2019 of 2.75 per cent versus its current forecast of 3 per cent, and below-trend growth for 2020 of 2.25 per cent.

Capital Economics senior economist Marcel Thieliant went further, predicting cuts in May, August and November.

“We suspect that the sharp fall in underlying inflation in the first quarter will be enough to prompt the Reserve Bank of Australia to cut interest rates to 1.25 per cent on Tuesday, May 7,” he said.

“And given that we expect the labour market to start slackening soon, we think rates will fall to 0.75 per cent by year-end.”

Mr Thieliant said the RBA would be “rattled” by the fact that core market-services inflation slowed sharply in the first quarter despite the pick-up in wage growth in recent years. And with the economy facing the deepest downturn in the housing market in modern history, “we think the case for cutting rates in the face of a sharp slowdown in inflation is even clearer”.

Even if the RBA does not cut next month, Capital Economics’ Mr Thieliant doubts it will wait much longer before providing additional stimulus.

“The next shoe to drop is the labour market, which tends to be a lagging indicator of economic activity,” he said.

“We expect growth to slow to just 1.5 per cent this year, well short of the economy’s potential rate of around 2.75 per cent.

“As a result, jobs growth should start to slow again before long, underpinning our forecast that the unemployment rate will rise towards 5.3 per cent by year-end, which suggests that the downward pressure on services inflation will intensify further.”

The “below trend” forecast for growth in 2020 follows from the consistent view from the RBA that the growth rate in 2020 will be below that of 2019.


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