Three-for-Three RBA Forecaster Sees Limits to How Low Rates Go

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The Reserve Bank of Australia recognizes the limits of interest-rate cuts and has in mind a level it doesn’t want to go below, according to Nomura Holdings Inc.’s Andrew Ticehurst, who correctly predicted every call this year.

Ticehurst, one of just two forecasters surveyed by Bloomberg this month that haven’t been wrong-footed by the RBA in 2015, expects Governor Glenn Stevens will lower the cash rate to 2 percent in May from a record-low 2.25 percent. He will then stand pat for the rest of the year to assess the impact of policy easing and a weaker currency, Ticehurst said.

Australia’s central bank has lowered its benchmark by 2.5 percentage points since late 2011 to support confidence amid the end of a mining investment boom and a plunge in commodity prices. While that’s driven a record housing surge, it hasn’t revived business sentiment as unemployment climbed to a 12-year high in January. Unprecedented monetary easing around the world is making it harder for Stevens to weaken the Aussie by cutting rates that are still the second highest among developed nations.

The RBA has “some sort of limit in mind that they would be very reluctant to go below,” said Ticehurst, 47, who joined Nomura as an interest-rate strategist in December. “Because the cash rate is historically so low, every rate cut becomes progressively harder to justify, particularly when the economy faces other risks, including from high housing and commercial property prices.”

No Panacea

Low rates have helped drive a property boom, particularly in Sydney where dwelling prices climbed about 40 percent since a trough in May 2012. The pace of appreciation has been noted by regulators, who are trying to slow growth in loans to investors and ensure lending standards don’t slip. The RBA last month said easy monetary policy globally is spurring demand for Australia’s office buildings, raising risks of a future price slump.

While the Australian central bank’s benchmark cash target is historically low, it’s still well above the near zero levels maintained by the Federal Reserve, the European Central Bank and the Bank of Japan, which have also implemented bond-buying programs to provide monetary stimulus to their economies.

“The RBA does not believe that monetary policy can fine tune the economy and it does not believe that monetary policy can solve all our economic problems” said Ticehurst, who has previously held positions at Queensland Treasury Corp., QIC Ltd. and Suncorp Group Ltd. “Whereas other central banks like the BOJ and the ECB and the Fed have been prepared to be extremely aggressive and creative in the conduct of monetary policy over the last few years, we believe the RBA is more mindful of the limits of monetary policy.”

Weakness Overstated

Ticehurst, who also sees scope for fiscal measures to help support the economy, said the RBA didn’t have enough information to support rate reductions in either March or April. He’s confident the central bank will feel ready to cut in May.

Pacific Investment Management Co.’s Robert Mead said on Monday that, while a reduction next month would be the path of least resistance for the RBA, market assumptions about the next meeting are at risk of being disappointed.

“Given the signaling from the March and April meetings, a May rate move is no slam-dunk,” he wrote on the company’s website.

Ticehurst reckons the weakness of the nation’s economy has been overstated.

“My assessment is that the economy is running at only a modestly sub-trend pace, that the domestic data flow this year has actually been mixed rather than weak,” he said. “The challenge going forward is whether the recent decline in commodity prices causes growth to weaken from this point rather than accelerate gradually as the RBA has been forecasting.”

Economic Rebound?

The RBA’s current outlook is for annual gross domestic product growth to accelerate to a range of 3 percent to 4 percent by the end of 2016 from about 2.25 percent in mid-2015. It’s due to update its forecasts next month.

The unemployment rate is predicted to remain at 6.3 percent when the government releases on Thursday its official jobs data for March, according to a Bloomberg survey. Quarterly inflation data will also be published on April 22.

Ticehurst was among the 17 analysts who correctly forecast that the RBA wouldn’t shift rates on April 7, while 13 wrongly predicted a cut, according to a Bloomberg poll.

Although his first contribution to the Bloomberg analysts’ survey on behalf of Nomura was for the March meeting, Ticehurst did publish a report dated Jan. 30 that correctly foresaw the RBA’s decision to lower rates at its first meeting of the year. Of the analysts polled for the April decision, Ticehurst and Forecast Pte.’s Waqas Adenwala are the only ones not to have made a wrong call this year.

Beating Markets

They are also doing a better job than fixed-income markets at judging the path of RBA rates. The swaps market correctly called February’s cut, but erred in both March and April.

Traders are pricing in a further half percentage point of easing over the next 12 months, which would take the benchmark to 1.75 percent, and about a 75 percent chance the next reduction will come in May, according to Credit Suisse Group AG indexes. All 26 economists surveyed by Bloomberg last week are calling for a reduction next month.

“We’re very confident of one cut in May, we then think we’ll see a period of stability,” Ticehurst said. “If the RBA does anything after that it will be to lower, not to raise, and the forward impact of the recent decline in commodity prices will be something of particular concern to them.”

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