Negative Rates a Possibility for Australia's Central Bank: BTIM

  • RBA last week reduced cash rate to 1.75% amid weaker inflation
  • Central bank rate of zero or lower `a distinct possibility'

BT Investment Management predicts the Reserve Bank of Australia will cut its cash rate to 1 percent and could even take the benchmark below zero as inflation and economic growth disappoint.

The central bank last week lowered its cash target to 1.75 percent after government data showed consumer prices declined last quarter. BT’s Sydney-based head of income and fixed interest, Vimal Gor, says underlying weakness in the jobs market and domestic demand will spur “a whole lot more cuts” from policy makers, contrasting with swaps markets that are pricing in one more reduction within a year.

“The RBA still has scope to ease to help inflation recover and it’s quite clear to us that the RBA will be easing to 1 percent, with a move to 0 percent or lower a distinct possibility,” Gor wrote in a newsletter to clients. BT has about $11 billion in fixed-income assets under management.

Australia’s economy, struggling with the slump in commodity prices and a collapse in mining investment, now faces a challenge from the global disinflationary impulse that’s prompted central banks in Europe and Japan to adopt negative interest rates. The RBA on May 6 updated its forecasts for consumer price gains and said core inflation is likely to hold below the bottom of its target range this year.

August Easing

The central bank will take another quarter point off its key rate by August and keep the benchmark at 1.5 percent until the middle of 2017, according to a majority of forecasters surveyed by Bloomberg. Swaps market pricing indicates 23 basis points of easing in the coming six months, and 35 over the next year, according to data compiled by Bloomberg.

Nomura Holdings Inc. is one of those predicting an August cut, although it also sees an additional reduction in November.

“We believe the RBA has had a fundamental re-think about how low it might need to -– and how low it might be prepared to –- take the cash rate in this cycle,” strategists Andrew Ticehurst and George Goncalves wrote in a note to clients. With the prospect of U.S. interest-rate increases diminished and a lack of fiscal support from the Australian budget “the burden of adjustment is continuing to fall on monetary policy, and the RBA has likely resolved that it must step up to the plate, despite substantial and well-documented reservations,” they wrote.

Unsustainable Growth

The country’s economic growth shows a “lack of sustainability,” BT’s Gor said, pointing to risks including a slowdown in apartment building and reduced Chinese steel production. The fund manager also said high personal debt levels will act as a brake on consumption, while the government’s focus on safeguarding the nation’s AAA credit rating means it’s unlikely to deliver much of a spending boost.

Whether or not such large rate cuts from the RBA will be effective is “unclear,” according to Gor.

“RBA monetary policy has no influence over commodity prices or overcapacity in Chinese and Japanese markets,” he wrote. “This takes us back to the question of central bank credibility in being able to deliver on their objectives.”

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