Back-to-Back RBA Rate Cut Would Stir Up Memories of Crises Past

  • Swaps price 25% odds of June move; 10-year yield at record low
  • Wage growth data Wednesday will give next read on price trends

Forecasters and traders are in little doubt the Reserve Bank of Australia will cut interest rates again, and some are saying the specter of disinflation could warrant the first back-to-back easing in four years.

A decision to lower rates in June after policy makers reduced the benchmark this month would signal a level of urgency that the board last showed during the European fiscal crunch in 2012. Swaps traders are pricing in a 25 percent chance of a June cut and indicate the cash rate will settle around 1.37 percent in a year, from 1.75 percent now. Royal Bank of Canada is the only one of 27 forecasters surveyed by Bloomberg predicting it will come next month, with August the consensus for the next move. The 10-year bond yield on Monday fell to a record 2.20 percent.

“It’s normally crisis times, recessions or global financial crisis-type periods where you get those back-to-back moves and, well, it just doesn’t feel like that,” said Michael Blythe, chief economist at Commonwealth Bank of Australia in Sydney, who predicts a reduction in August. Even so, he added, the RBA will be looking at other countries and “what you are seeing elsewhere is inflation expectations have dropped pretty quickly.”

The quandary for policy makers is whether Australia’s inflation rut is a side-effect of the fading boom in mining investment that delivered a windfall to households or part of a wider malaise that’s infected developed economies around the world. With unemployment at a 2 1/2-year low and consumer confidence rebounding to the strongest since 2014, Australia is still some distance from the zero rates and asset-buying programs unleashed by other central banks.

Before 2012, the RBA made consecutive cuts after the global financial crisis of 2008, and back in 2001 -- when the bursting of the dotcom bubble was followed by the Sept. 11 attacks on the World Trade Center. Over the past two decades, the back-to-back reductions of 1996 were the only ones where inflation appeared to be the overriding factor. Then Governor Ian Macfarlane pointed to the “improvement in the outlook for inflation, which has increased the scope for the economy to sustain a faster rate of growth,” after a period of too-high price growth.

How times have changed.

In the quarterly statement on monetary policy released this month, the RBA predicted core inflation is likely to be below the bottom of its target range of 2 percent to 3 percent this year and will probably only rise back to that level in the ensuing two years. The estimates incorporated market pricing for further reductions to the cash rate.

Rare Forecast

It’s rare for the RBA to put forward forecasts that show price-growth staying outside its band for an extended period, CBA’s Blythe wrote in a report last week. “There are only three other examples we can find in the 23‑year inflation targeting period,” he wrote.

The last time the RBA’s forecasts were really shaken up was in 2012, when both inflation and growth looked weaker than the bank had been expecting and officials responded with quick-fire easing, said Michael Turner, a fixed-income strategist at RBC.

The next read on the strength of inflation will come with data on Wednesday for the wage price index, with the year-on-year growth rate forecast to have stagnated at a record-low 2.2 percent in the first quarter, according to a Bloomberg survey of analysts. After that, officials will have to wait until the July 27 release of the consumer-price index for an update on inflation, one reason why many economists have coalesced around August as the likely time for the next borrowing cost reduction.

“The RBA’s not mechanical, we know that, but we struggle to see how they can make the case to be reactive at this stage of the cycle when clearly the May decision was at least partial recognition that they may have been behind the curve,” Turner said. “Underlying inflation’s obviously very important for them and that’s clearly fallen below where they thought it would be, so we think that warrants more than just a modest tinkering and we think that the case is there for June.”

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