• 20 of the 27 surveyed by Bloomberg look for the RBA to cut its cash rate by 25bp to 0.75% at its October 1 meeting.

 

ANZ: We expect the RBA to cut by 25bp on Tuesday, taking the cash rate down to 0.75%.

 

• We think the recent employment data has made the case. The decline in private sector job vacancies is accelerating and now dragging down the overall level of vacancies. We doubt the public sector can maintain its recent pace of job creation, suggesting that a sharp slowdown in employment growth lies ahead.

• At the same time the pace of central bank easing globally is picking up. If the RBA disappoints a market that is around 75% priced for a move next week then the AUD may well spike – something that the RBA will regard as undesirable.

• The Governor hasn’t been quite as explicit in signalling an easing at the upcoming meeting as he was ahead of the June Board meeting. So it is possible the RBA prefers to wait for more data before it moves.

 

BofAML: It would be a surprise if the RBA did not cut rates to 0.75%.

 

• Lowe confirmed that “there has been an accumulation of evidence” that the economy can sustain lower unemployment, meeting a threshold set out at the last board meeting. It is also clear from his speech that the currency is central to efforts to support growth and boost inflation.

• We thought the RBA could resort to a more gradual approach to use of monetary policy so close to the effective lower bound.

• The Governor balanced this guidance against a more upbeat message that growth is at a turning point and he conceded further easing would likely boost the housing market. This should support market pricing on the likely terminal rate for the RBA around 0.5%.

• The Bank is aware that easier policy risks a new mini-house price boom compounded by lack of supply from the slowdown in residential construction. Debt ratios were a major macro risk that warranted macro prudential measures during the last housing boom. So the lack of scope for conventional policy to respond to any shock to the labour market will likely leave the economy more vulnerable after this easing cycle.

 

CBA: A cash rate cut is firmly on the cards. We believe that the latest labour force data is the catalyst for the RBA to act in October.

 

• Governor Lowe delivered a dovish speech at a business dinner in Armidale this past week. The Governor sounded particularly downbeat on the global economy and downside risks generated by geopolitical developments. The RBA Governor implied that developments in the global economy and the decisions of other central banks to ease policy appear to be more important than usual at this stage in the RBA’s monetary policy deliberation.

• While the speech was not crystal clear a rate cut was imminent there were enough signals to indicate that a 25bp will be delivered on 1 October.

• The Governor though did appear deliver a glass half full approach to domestic developments and reiterated he expects “lower interest rates, the recent tax cuts, the depreciation of the Australian dollar, ongoing spending on infrastructure, the stabilisation of the housing markets in some cities and a brighter outlook for the resources sector” to lead to a lift in economic growth from here”.

 

Commerzbank: In our view, it is somewhat more likely that the RBA will leave its key rate at 1.00% next Tuesday. However, the decision is likely to be tight and a rate cut by the end of the year is to be expected.

 

• After all, there are strong arguments for a further easing of monetary policy: the unemployment rate has unexpectedly risen slightly recently, inflation remains below the RBA target range, and uncertainty regarding the trade conflict between the US and Australia’s most important trading partner China remains high.

 

ING: We think the RBA will be reluctant to add to its recent easing with further stimulus unless conditions start to deteriorate again. Simply being below “target” is not enough.

 

• Although Australia’s year-on-year GDP growth slowed for the fifth consecutive quarter to 1.4% in 2Q19, it doesn’t really qualify for weakness when the quarterly growth rate is still holding steady, at 0.5% in the last quarter. And it’s not GDP growth alone, but inflation that also drives the RBA’s monetary policy. Inflation gained some traction recently on the back of firmer jobs and wages growth.

• Even so, a rise in the unemployment rate to a one-year high of 5.3% in August from 5.2% in July looks to have swayed some forecasters towards a rate cut next week, making this event too close to call.

 

J.P. Morgan: We have long held the view that rates are poised to move lower, though the dovish minutes from the September board meeting prompted us to bring forward the timing of the next move to October (from February). With global risks still elevated and the domestic economy operating well below potential, we expect further policy easing in early 2020.

• In a speech earlier this week, the governor’s narrative on the domestic economy was consistent with the outlook presented in the August SoMP, in which the Bank articulated that the economy had likely reached a gentle turning point in H219. While it might be tempting to view this as supportive of stable policy near term, it is important to remember that this forecast was predicated on a 25bp easing before year-end (and another in H120).

• In that context, there was nothing in the governor’s characterization of the domestic economy that was inconsistent with a rate cut in 4Q, or October. The speech also made clear that the RBA is increasingly worried about global developments.

• On this front, recent news has not been encouraging, with the flash PMIs for September signalling that the drag on the industrial sector is intensifying at the same time it is spilling over into services activity. And with the Fed, BoJ, and ECB all forecast to ease in 4Q, the influence of lower global rates on domestic monetary policy remains significant. Against this backdrop, we think the RBA will elect to cut the cash rate by a further 25bp in October.

 

Morgan Stanley: It is a close call, but we think it is more likely than the market is pricing, that the RBA holds rates in October to allow for more data to assess the impact of stimulus to-date.

 

• Our view has been that the RBA is waiting for macro data to disappoint on its forecasts before cutting rates further.

• While the market moved to aggressively price in an October rate cut post the August labour market print, we are less convinced that the data have deteriorated enough to drive an October cut. In particular, the impact of stimulus to-date is still uncertain – although the RBA is characterizing it as driving a gradual recovery. Hence, on balance, we think it is more likely than the market is pricing, that the RBA stays on hold in October.

• More broadly we do expect that data will disappoint going forward and drive two more rate cuts by the end of the year. In particular, ahead of the November meeting we expect that the labour market will soften further, stimulus to-date to show signs of disappointing and the Fed cuts rates at its October meeting. We think the RBA will move decisively when it does move again and front-load cuts ahead of the important Christmas period. Hence, we expect two rate cuts before the end of the year, in November and December.

• Looking ahead to next year we are sceptical on the impact that additional rate cuts will have in driving a sustainable recovery. In our view this makes further stimulus next year likely. However, we continue to expect that a more meaningful fiscal stimulus is likely to come next year, which makes the likelihood that the RBA is required to resort to QE low. A fiscal stimulus underpins our expectation for a 2020 recovery in economic growth, despite a cautious near-term outlook, and should see the RBA on hold through the year

 

NAB: We expect the RBA to cut the cash rate by 25bp to 0.75% on Tuesday.

 

• This reflects our view that an underperforming economy requires more policy support, with Governor Lowe stating there had been “an accumulation of evidence” that unemployment can be lower and stressing that ignoring lower world rates would see a higher exchange rate.

• We expect the press release and comments from the governor later the same day will justify the decision, but not offer any guide to future moves, other than to say that rates are likely to stay low and that the Board will monitor developments to see if further easing is needed. The RBA commentary could also repeat that the economy may be at a “gentle turning point”.

 

Nomura: We maintain our cautious and below-consensus view on Australia, and believe the case for further easing has grown. We see the October Reserve Bank of Australia (RBA) board meeting as finely-balanced but narrowly favour the next 25bp rate cut being delivered in November.

 

• Underemployment has risen and RBA communication has softened. However, easing guidance has been less strong than prior to rate cuts in June and July, and the RBA board may wish to observe global developments, including planned US tariff hikes in mid-October and any Chinese and market response, before acting.

 

RBC: It is a line ball call for the RBA at this board meeting. Further rate cuts are largely a matter of when, not if. We still think the RBA can afford to be patient, awaiting some of the more timely and policy sensitive data (including Aug retail sales later in the week) to get a better sense of the expected upturn in activity. These data in recent months have been mixed. We lean towards no cut.

 

• However, as we noted following the Governor’s recent Armidale speech, the RBA often delivers what is priced by the market, especially if a cut is likely at some point before year end so a move would probably not be surprising.

 

Scotiabank: Governor Lowe was a little difficult for rates and FX traders to interpret in his recent speech. Lowe noted that further easing may be required, that an extended period of low rates is likely, that QE is unlikely but would be considered if necessary, and that monetary policy is becoming less effective at the margin. The latter was perhaps a point of frustration as the RBA – like many central banks – perhaps wishes to see fiscal policy play a larger role.

 

• Regardless, there were no direct signals toward imminent easing. The remark that further easing may be necessary has Scotia slightly leaning in favour of a reduction. Also, while wage growth has trended upward over recent years, progress has recently stalled, and the labour force participation rate continues to rise. The combined influences suggest little inflation – oriented pressure from wage growth.

 

TD Securities: The RBA Governor’s speech to the Armidale Business Chamber did not cement a 25bps cut next week. However, we believe the Bank is likely to ease at the meeting.

 

• The RBA’s Aug SoMP technical assumptions assumed the cash rate moves in-line with market pricing and the Aug RBA Minutes noted “A 25 basis points reduction had been fully priced in by November 2019”. Q2’19 GDP at +0.5%/q missed the RBA’s +0.75%/q forecast and the RBA Gov noted in his Armidale address “we did not expect this slowdown, so it has come as a bit of a surprise”. This miss means the RBA is already playing catch up to achieve its late 2019/2020 GDP forecasts that assume a 25bps Nov cut is delivered.

• The bulk of the analyst community has moved forward the Nov cut to Oct and the RBA’s Sep Minutes removed any reference to “the accumulation of additional evidence” for it to cut that had appeared in the Aug Minutes. With the RBA playing catch-up to its GDP forecasts and wages growth looks to have stalled, there is little reason for the RBA to wait to Nov to cut.

 

UBS: In our view, Governor Lowe has all but ‘pre-committed’ to an October rate cut.

 

• In the August minutes, the Board said they “would consider a further easing of monetary policy if the accumulation of additional evidence suggested this was needed”. The September minutes removed the “accumulation of evidence” precondition for a cut. In a further dovish step, Lowe noted at the next Board meeting “we will again take stock of the evidence” – which we think clearly argues for a cut in October – as Lowe now acknowledged the “soft patch” in domestic growth; more explicitly linked global rate developments with Australian rates (after the Fed & ECB cut in Sep); & the recent uptick in unemployment further deviated from the RBA’s view that “the economy can sustain lower rates of unemployment”.

• Hence, we still expect the RBA to cut 25bps in October, & again in Feb-20 & May-20 to 0.25% amid rising unemployment & further global central bank easing. In our view, Lowe’s speech reduced the risk of an ‘onhold’ in October, but if the RBA does hold, a cut in November is clearly still very likely.

 

Westpac: Westpac Economics expects the RBA Board to trim rates to 0.75% in October, and then to 0.50% in February 2020.

 

• Powerful headwinds are impacting the economy, notably: (1) a global slowdown; (2) structural challenges around weak wages and productivity growth; and (3) a period of cyclical weakness centred on the construction / housing sectors.

• We assess that the case for a further cut has been made. The RBA Governor’s recent speech appears to support this view. Domestically, the starting position for the economy is weaker than anticipated. Globally, policy is being eased – a development that if ignored by the RBA would see upward pressure on the currency. A rise in the AUD would be unwelcome in the current environment.

Source – MNI

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