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5 May 2015
RBA cuts rates to record lows, more easing ahead – Capital Economics
FXStreet (Barcelona) - Paul Dales Chief Australia & NZ Economist at Capital Economics, explains that RBA has scope for further cut rates to 1.5% by December, with the Australian central bank cutting rates to a new record low of 2.00% in today’s monetary policy meeting.
Key Quotes
“The cut in interest rates to a new record low of 2.00%, from 2.25%, announced by the Reserve Bank of Australia (RBA) today is unlikely to be the last in this cycle.”
“Our forecast that both GDP growth and underlying inflation will be weaker this year than the RBA expects suggests that rates could yet fall to 1.5% by December. That could prompt the dollar to weaken from US$0.79 now to around US$0.70.”
“Our forecast that a marked slowdown in both GDP growth and underlying inflation lies ahead suggests that rates will be cut below 2.0%. We won’t know the RBA’s new GDP growth and inflation forecasts until they are published in the Statement on Monetary Policy on Friday. But we are willing to bet that, even if they are revised down a bit, they will still be more optimistic than our own.”
“Largely due to the lagged effects of last year’s sharp fall in the prices of some key commodity exports, we expect that GDP growth will slow from 2.7% last year to just 1.8% this year. The resulting rise in spare capacity will probably drive underlying inflation from the current rate of just under 2.5% to below the RBA’s 2-3% target range. As such, we believe that the RBA needs to do more.”
“What’s more, other central banks have demonstrated that cutting rates close to zero doesn’t cause any practical problems. Interest rates in the euro-zone are currently 0.05%, in Japan they are 0-0.10%, in the US they are 0-0.25% and in the UK they are 0.5%. As such, there is still scope for the RBA to do more.”
“As we have pointed out before, if the interest rate lever isn’t working as well, it doesn’t make sense to leave it alone. Instead, to get the same result you need to pull it harder and more often. This would also have the beneficial effect of weakening the dollar, whose strength is a source of growing frustration for the RBA.”
Key Quotes
“The cut in interest rates to a new record low of 2.00%, from 2.25%, announced by the Reserve Bank of Australia (RBA) today is unlikely to be the last in this cycle.”
“Our forecast that both GDP growth and underlying inflation will be weaker this year than the RBA expects suggests that rates could yet fall to 1.5% by December. That could prompt the dollar to weaken from US$0.79 now to around US$0.70.”
“Our forecast that a marked slowdown in both GDP growth and underlying inflation lies ahead suggests that rates will be cut below 2.0%. We won’t know the RBA’s new GDP growth and inflation forecasts until they are published in the Statement on Monetary Policy on Friday. But we are willing to bet that, even if they are revised down a bit, they will still be more optimistic than our own.”
“Largely due to the lagged effects of last year’s sharp fall in the prices of some key commodity exports, we expect that GDP growth will slow from 2.7% last year to just 1.8% this year. The resulting rise in spare capacity will probably drive underlying inflation from the current rate of just under 2.5% to below the RBA’s 2-3% target range. As such, we believe that the RBA needs to do more.”
“What’s more, other central banks have demonstrated that cutting rates close to zero doesn’t cause any practical problems. Interest rates in the euro-zone are currently 0.05%, in Japan they are 0-0.10%, in the US they are 0-0.25% and in the UK they are 0.5%. As such, there is still scope for the RBA to do more.”
“As we have pointed out before, if the interest rate lever isn’t working as well, it doesn’t make sense to leave it alone. Instead, to get the same result you need to pull it harder and more often. This would also have the beneficial effect of weakening the dollar, whose strength is a source of growing frustration for the RBA.”