The RBA cut rates as expected. But are more on the way?
The RBA cut rates today. No surprises there… if you’ve been following my blog anyway.
There is going to stimulate the property market, make no doubt about that. A lot depends on how much pass-through we see from lenders, but with funding costs easing in recent months, we should see a pretty good chunk of it passed through to consumers.
… and awaaaay we go.
The next question then is, just how many rate cuts are we going to see? It’s unusual for the RBA to cut once and then walk away. Markets are currently pricing in two rate cuts, but how certain can we be?
Terry McCrann at the Telegraph (who many people in the market think is a mouth-piece for the RBA), was keen to point out earlier in the week that only one rate cut was a certainty:
The absolutely basic thing to understand is that next week’s cut is the only cut the RBA has locked in.
…Yes, it might broadly think it probably will deliver a second cut. Yes, it can analytically feel that it might end up delivering even more cuts.
But right now, it’s 25 points and then the RBA will step back to analyse and try to anticipate in 24/7 real-time.
McCrann reckons the election was a real game-changer, and the RBA will want to wait and see what impact that shock result will have.
But whatever the case, markets still think two rate cuts this year is still the most likely outcome.
But not everyone in the market thinks that. Bill Evans at Westpac, one of the most respected economists in the country, is now looking for three rate cuts.
Last week Westpac moved forward its forecast for RBA cash rate cuts from the original forecast on February 21 of cuts in August and November to cuts in June; August and November.
Therefore, Westpac is now forecasting three cuts in 2019 to push the cash rate from 1.5% to 0.75% and to hold at that level through 2020.
… Consequently our central forecast for the terminal cash rate in this cycle is 0.75% with risks to the downside, although we would certainly see 0.5% as the floor for the cash rate, with QE a more effective policy tool thereafter.
Wow. Three rate cuts. Can you imagine that?
But hang on. Bidding is still open. Do I hear four rate cuts? Four rate cuts anyone?
Yes! Four rate cuts, to the woman in the smart pant-suit at JP Morgan:
JP Morgan’s Sally Auld is looking for four rate cuts this cycle:
“A number of developments in recent months suggest the RBA is unlikely to achieve desired macro-economic outcomes with only 50 basis points of easing…
“… Not only is the real cash rate now at its highest level in three years, but a lower level of inflation implies that more than 50bp of easing will be required to return real short rates to appropriate levels.
“Our sense is that the combination of global headwinds, and the RBA having slipped behind the curve, could therefore be decisive in bringing four cuts, rather than three.”
But surely the bidding can’t go any higher than that, right? Oh no, hang on. Former RBA board member Prof. Warwick McKibbin is on the phone… and yes, helicopter money, the bid now stands at helicopter money.
“If we ever got to a situation that Europe or Japan is in, I’d move straight to helicopter money,” Professor McKibbin told The Australian Financial Review.
Rather than using quantitative easing – which he says aims to lower long-term interest rates but can often hurt savers, particularly older people living off fixed incomes – he says it makes more sense to have the central bank print money for the government to spend.
“You bring down the barriers between the fiscal accounts and the monetary accounts. Therefore the government spends and puts money in the hands of people.
Look, I reckon we can bank on two rate cuts, with further rate cuts a definite possibility, but largely dependent on what happens in the global economy.
If the trade war between the US and China gets bumpy for example, then yes, three or four rate cuts are definitely a possibility.
And just as has happened in every rate cutting-cycle before, property will be the first and primary beneficiary.
And awaaaaay we go.