J.P.Morgan - Australia’s Reserve Bank to resume easing cycle in April

JP Morgan - Australia’s Reserve Bank to resume easing cycle in April

Australia’s Reserve Bank Board next meets on April 7. We now expect a 50bp rate cut; previously, we thought RBA officials would wait until midyear before cutting the cash rate again. In the wake of more grim news on the global economy and evidence that the RBA’s decision on March 3 to leave the cash rate steady was a closer call than it first appeared, we now believe that the case for an earlier move has become more compelling. That said, with uncertainty about the economic outlook still high, the April decision also is likely to be a close call. In addition, we have lowered our forecast for the terminal cash rate 25bp to 2.5% on the assumption that the RBA also will cut the cash rate again in May, albeit more modestly than in April.

First, the minutes of the March meeting released last week showed that the decision was a much closer call than we were led to believe. Officials saw merit both in cutting the cash rate and in holding fire; this came as a surprise—the policy announcement two weeks earlier had suggested that the decision to keep the cash rate steady at 3.25% was relatively straightforward. The revelation in the Board minutes that the March decision instead was a line-ball meant that each subsequent meeting was “live,” particularly given the blizzard of bad news from offshore. The pause we originally thought would last for months could, in fact, last only a few weeks.

Second, there has been plenty of disturbing news on the global economy since the last Board meeting, suggesting that the RBA’s “tolerance” is being tested. Until the March policy announcement, when officials seemed to use Australia’s relative outperformance as another excuse to leave the cash rate steady, developments offshore had been the main driver of RBA policy.

Third, conditions in financial markets are troubling enough to justify the US Fed announcing a program of Treasury purchases in large quantities, and other central banks are engaging in varying degrees of quantitative easing—these are important developments for the RBA policy outlook. One interpretation is that, with key central banks “on the case,” the RBA’s job of supporting growth in Australia may be complete. We believe, though, that RBA Board members will interpret bold actions by other central banks as evidence that global financial markets remain dysfunctional, rather than an opportunity to let others do a disproportionate share of the heavy lifting.

<>