JPMorgan, Westpac See RBA Cuts Delayed as Inflation Offsets Jobs
JPMorgan Chase & Co. and Westpac Banking Corp. pushed back their forecasts for when Australia’s central bank will lower interest rates, with the strongest inflation in two years offsetting rising joblessness.
They join Bank of America Corp. and Royal Bank of Canada, which shifted their predictions in the past three months. The estimates for delayed easing come as reports paint a mixed picture of the economy’s transition to new growth sources amid the ebbing of a mining boom. Having priced in a 26 percent chance of a first-quarter rate cut after the weak jobs report on Jan. 16, swaps traders slashed the odds to 11 percent after Jan. 22 data showed inflation was accelerating.
“There are some fundamental problems in the economy,” said Stephen Walters, JPMorgan’s chief economist in Australia, citing below-trend growth and rising unemployment in a phone interview yesterday. “Yet, an inflation number like that makes it difficult for the Reserve Bank to do anything about those issues in the near term.”
A report this week showed the trimmed mean gauge of core prices unexpectedly rose 2.6 percent in the last three months of 2013 from a year earlier, climbing above the mid-point of the central bank’s target range and the strongest reading since 2011. That followed data showing the worst annual drop in full-time jobs in more than two decades. Australia’s Treasury predicts the unemployment rate will increase to 6 percent by July 1, the highest since 2003, from 5.8 percent in December.
The pickup in the pace of consumer-price gains is “almost exclusively” due to a decline in the Australian dollar last year, Bill Evans, chief economist at Westpac, wrote in an e-mailed report yesterday. The acceleration will prove short-lived and policy rates will be cut once the data confirms this outlook, he wrote.
“Weakness in domestic demand will contain the secondary impact on inflation from the weaker currency,” Evans wrote. “The Reserve Bank is likely to require convincing evidence of our assessment of inflation risks before it opts for lower interest rates.”
Australia’s cash rate stands at a record-low 2.5 percent. Westpac now sees it at 2 percent by the end of 2014, after two 0.25 percentage point reductions in the second half. That compares with a previous call for cuts in the second and third quarters.
Bank of America said in a Jan. 10 note that the RBA will trim its benchmark to 2.25 percent by mid-year, from an earlier prediction for February. RBC pushed its call for a quarter-point cut to the three months through June, from December 2013 previously, according to an Oct. 14 report.
The median forecast of 29 economists is for the cash rate to remain unchanged through 2014, according to a Bloomberg News survey.
The Australian dollar fell 0.2 percent this week to 87.68 U.S. cents as of 9 a.m. in Sydney and yesterday touched 87.32, the lowest level since July 2010.
Further declines may be limited by prospects inflation pressures will keep the central bank from lowering its key rate further after slashing it 2.25 percentage points over two years.
The RBA has indicated it would prefer a lower exchange rate to stimulate the economy. Governor Glenn Stevens said last month in an Australian Financial Review interview that a level of 85 U.S. cents would be “closer to the mark.” The Aussie won’t fall to that level until the final quarter of this year, according to the median of estimates compiled by Bloomberg.
Policy makers will probably keep trying to verbally drive the local currency lower, according to JPMorgan’s Walters.
Even so, “it’s very difficult, seemingly, for the Aussie to break meaningfully to the downside,” said Walters, who sees the currency at 87 by Dec. 31. “The onus is going to be on the cash rate to do the work.”
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