RBA: Two 25bp cash rate cuts coming in 2017 - NAB

Research Team at NAB Economics have changed their RBA cash rate view to include two 25bp cuts in 2017, with the possibility of unconventional monetary policy thereafter.

Key Quotes

“At its August meeting, the RBA cut the cash rate by 25bps to 1.5% (against our expectations) following a similarly-sized 25bp cut in May. Major banks have since passed on some, but not all, of the easing through to lending rates. The RBA Board concluded that “prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting”.

This suggests:

• That the Board believes that monetary policy continues to be effective in Australia (although it is unclear whether the RBA expected banks to pass on the cut in full or not),
• That house price risks have diminished (there was a large paragraph to this end despite what we consider to be very strong house price growth recently), and most importantly, and
• That the Bank preferred to take out some extra insurance on the inflation target front.

NAB continues to see a reasonably solid economy in the near-term, supported by an improved non-mining economy (particularly with strong growth in residential construction) and increased hard commodity production. However, the risks to the outlook going into 2018 are becoming increasingly apparent, as LNG exports flatten off at a high level and the dwelling construction cycle turns down. Consequently, NAB’s forecasts for GDP growth are factoring in more headwinds going forward, widening the spread between NAB and RBA forecasts to around 1½ ppts by late 2018 (NAB forecast 2.2% over 2018 vs RBA’s 3-4%).

In essence, CPI inflation is expected to remain below the target band for an extended period, while structural shifts in the economy and modest economic growth put pressure on the labour market in the longer-term.

Although we are not as quiescent as the RBA with respect to house prices, nor are we convinced lower rates will have a material impact on inflation, we do expect the RBA will react by providing further support. This will include two more 25bp cuts in May and August 2017 (to a new low of 1%), which should be enough to stabilise the unemployment rate (which is currently a concern for the RBA) at just over 5½% and prevent economic growth from dropping below our forecast of 2.6% (average) in 2018.

Monetary policy deliberations may then turn to the possible use of non-conventional policy measures if the outlook deteriorates further. Additionally, persistent weakness in CPI inflation could potentially trigger a rate cut even sooner than expected.”