Big banks accelerate rate cut predictions

Rates are still way too high

We might be on the cusp of a tsunami of rate cuts.

The economic picture is weakening, and there’s nothing to hold the RBA back.

CBA now expect a machine gun of rate cuts over the next six months:

“We now expect the RBA to cut the cash rate by 25bp to 3.60% at its 7-8 July meeting”, CBA senior economist Belinda Allen wrote. “And a follow up 25bp rate cut in August”.

“Today’s monthly CPI print capped off a flow of data that should provide comfort to the RBA that a swifter return of the cash rate to neutral is both manageable and needed”, Allen wrote.

Yep. Things in the past few weeks have come in weaker than expected. (Not that expectations were high to begin with.)

First up, GDP printed below expectations at just 0.2% for Q1 and 1.3% annually, (below RBA’s estimate of 0.4% quarterly growth.)

Second, business and consumer sentiment are very weak.

“The closely watched NAB business survey took a turn down in May, with business conditions sitting below the long-term average”, Allen noted. “The employment subcomponent also reached a cycle low”.

All that with inflation sinking like a stone. It came in at 2.1% headline a week or so ago, below the consensus estimate of 2.3%.

“We expect there is enough evidence for the RBA that the disinflation pulse in the economy should continue and inflation should sit around the mid-point of the target band”, Allen noted.

Yep. Rate cuts are go.

But then there’s also this:

“The path is clear for the RBA to move the cash rate swiftly back to a more neutral rate of ~3.35%”.

Yeah, about that.

The neutral rate is the interest rate that isn’t so loose as to be spurring economic activity on, or so tight as to be slowing things down. It’s the steady as she goes interest rate.

But where is it? 3.35%? Maybe.

Or maybe not. Westpac reckon it could be in the 2’s:

Soft GDP data for Q1 has again raised questions of whether the RBA is behind the curve and has left policy too tight for too long. As we have been highlighting for some time, underlying growth in Australia remains weak and sensitive to pauses in the expansion in the care economy. With inflation in the 2–3% target range already, and likely to stay there, why wouldn’t the RBA cut further and faster than previously believed?

A year ago, the RBA’s view was coloured by surprisingly convergent estimates of r* well above 3%, implying that monetary policy was restrictive, but perhaps not that restrictive.

However, new models were introduced between November last year and February this year that were at the lower end of the existing range of models. The average of all these estimates is now in the high 2s rather than the low-to-mid 3s range we have favoured for both the US and Australia.

Yep. The RBA is behind the curve. Rates are still way too restrictive.

They need to come down.

And quickly.

JG.