Goldman, JPMorgan Hold Out With Bet on Aussie Rate Cut

And then there were three: Goldman Sachs Group Inc., JPMorgan Chase & Co. and Macquarie Group Ltd. are sticking to bets the Reserve Bank of Australia will resume lowering interest rates as others ditch their rate-cut calls.

Westpac Banking Corp., National Australia Bank Ltd. and Bank of America Merrill Lynch economists -- with a century in combined experience -- now expect the RBA will maintain the record-low 2.5 percent cash rate. While keeping expectations for sub-par growth, they’ve bowed to Governor Glenn Stevens’s insistence borrowing costs are on hold for “some time yet.”

Goldman’s Tim Toohey, JPMorgan’s Stephen Walters and Macquarie’s Richard Gibbs think Stevens is wrong, with subdued prices, a forecast rise in unemployment, an elevated currency and government budget cuts seen forcing further reductions.

“You’ve got fiscal tightening being accelerated, so there’s absolutely no scope for the Reserve Bank to be considering hiking rates,” Sydney-based Gibbs said in a May 19 interview. On the same day, Walters said he sees unemployment rising, the currency too high and the budget weighing on growth, while recognizing “something will have to change” to prompt the RBA to overcome its reluctance to lower rates again.

Australia’s treasurer last week announced cuts to spending on welfare and the public service and a new tax on the highest paid, adding fiscal consolidation to a slump in mining investment as brakes on growth. At stake: the survival of a domestic demand revival that’s seen the jobless rate drop, house prices surge, and most economists and financial markets abandon any expectation of further monetary policy easing.

Fiscal Grind

Consumer sentiment plunged 6.8 percent to 92.9 in May from a month earlier, an index from Westpac and the Melbourne Institute showed today. That’s the lowest level since August 2011, prior to the central bank’s most recent easing cycle.

“In an environment where domestic demand is already fragile and significant risks remain in the handover from mining led economic growth, this budget does pose a risk to the near term outlook,” Goldman’s Melbourne-based Chief Australia Economist Toohey wrote in a note to clients dated May 14. “A return to the grind of fiscal repair looms large.”

Walters and Gibbs say the budget cuts and resulting hit to consumer confidence from the measures, a stubbornly high currency, rising unemployment as growth remains below trend and incomplete transition from mining investment will prompt another move.

“Gee, that’s positive for the Aussie dollar,” Gibbs cited foreign investors as saying after the budget release forecast narrowing deficits, meaning the elevated Aussie will remain a drag on growth. “It’s the tightening of conditions leading to probably another round of job losses and pressure on domestic demand” that will drive the RBA to cut again, he said.

Aussie Dollar

The Australian dollar has firmed since Stevens switched to a neutral bias in February, curbing exporters’ competitiveness. It traded at 92.38 U.S. cents at 12:16 p.m. in Sydney. Swaps traders see the cash rate moving 3 basis points higher in a year, according to a Credit Suisse Group AG index, down from 8 points yesterday and from 3 points in cuts on March 3.

Even those economists who have abandoned rate-cut calls recently and now see the central bank remaining on hold for an extended period don’t necessarily believe it should be.

“It doesn’t reflect any change of view on our part about the outlook,” said Merrill Lynch’s Chief Australia Economist Saul Eslake, who on May 16 switched his rate call to on hold. “Dropping it doesn’t mean we’ve become a lot more optimistic or less pessimistic about the economy, just that we now accept the Reserve Bank is reading things differently from us and it’s their view that counts, not ours.”

‘Sharp Fall’

Westpac’s Bill Evans, who called the most recent easing cycle, abandoned his prediction of further rate cuts in March after stronger-than-expected jobs data and said the central bank was indicating a “high hurdle” for easier policy.

“The sharp fall in the index is clearly indicating an unfavorable response to the recent federal budget,” Evans said today of the sentiment slump. “Respondents were particularly concerned about the impact of the budget on their own finances.”

NAB’s Alan Oster announced he had dropped his reduction call on May 12.

Low rates have spurred property prices. House and apartment prices in the largest cities climbed 11.5 percent in April from a year earlier, led by a 16.7 percent increase in Sydney.

Export Boom

Government data released this month showed Australia’s exports to China, its biggest trading partner, climbed to a record A$9.5 billion ($8.8 billion) in March, even as the trade surplus narrowed to A$731 million for the month.

The RBA maintained its steady view in minutes of the May 6 meeting released yesterday in Sydney. “Overall growth in coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investment and the planned fiscal consolidation,” it said. “The current accommodative stance of policy was likely to be appropriate for some time yet.”

The nation’s Secretary to the Treasury Martin Parkinson, in his traditional speech after the budget, said non-mining industries need to grow more rapidly to keep unemployment low.

“We are seeing some positive signs, particularly in the household sector,” he said in Sydney yesterday. “But with businesses in the non-resources sectors continuing to exercise caution in their investment and hiring decisions, the forward indicators suggest that it will be at least another year or two before strong broad-based growth takes hold.”

Evans, when he made his call for the RBA to cut rates in July 2011, was Australia’s loneliest forecaster at the time. Yet within a few weeks markets swung to his view. In 2009, JPMorgan’s Walters was alone in picking Stevens’s decision to become the first Group of 20 policy maker to boost rates after the height of the global recession.

“Our job is to forecast what the Reserve Bank will do, not preach as to what they should do,” Eslake said.

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