Market turmoil not enough to spur RBA rate cut, top economists say

Markets are pricing in another rate cut but economists think the RBA will hold off for most of the year. Photo: Nicholas RiderA rate cut is unlikely when the Reserve Bank of Australia meets next month and rates will possibly remain on hold for the rest of this year despite the global market turmoil, according to top market economists, who point instead to encouraging signs in the local economy


A survey of the nation’s most prominent market economists by The Australian Financial Review found 13 out of 14 expect rates to remain on hold at the first board meeting of the year, despite the market turmoil which has wiped nearly $120 billion from the Australian sharemarket, battering consumer confidence.

Just AMP’s Shane Oliver believes the rout, spurred by concerns about global growth, particularly from China, and weakening commodity prices would prompt the central bank to cut in February to a new record low 1.75 per cent.

“But I doubt that it is convinced to move just yet,” he said.

“A much lower than anticipated December quarter inflation release next week could tip the balance though in favour of a February cut as it would make two quarters in a row of lower than expected inflation.”

Inflation will be watched closely next week and is tipped to have expanded 0.5 per cent in the fourth quarter of 2015, a total of 1.5 per cent for the year, according to a Bloomberg survey.

On Tuesday inflation figures in New Zealand revealed growth had fallen to 0.1 per cent, pushing it towards annual deflation for the first time since 1999, and adding pressure on its central bank to lower rates.

At home, economists including HSBC chief economist Paul Bloxham, have retreated on their expectations of a February cut. The bank pushed back an expected cut on the back of recent positive economic data.

“We shifted our view for a cut from Q1 to Q2 on the back of recent strength in the labour market,” he said.

Last week Australian Bureau of Statistics data showed the unemployment rate had steadied in December at 5.8 per cent, posting better-than-expected numbers following a quarter which boasted more than 126,000 new jobs.

A cut in the second quarter may not be necessary should a tangible fall in the Australian dollar precede it, Mr Bloxham said. The dollar has fallen 5 per cent this year alone to near 2009 levels, and 30 per cent in 18 months buying US69¢.

“The RBA would be reasonably happy with the decline of the Australian dollar of late as it has caught up with the decline in commodity prices,” BetaShares chief economist David Bassanese said.

Brent oil is trading at 12-year lows, buying under $US28 a barrel.

Overnight, the Bank of Canada opted to leave interest rates on hold, despite the impact of the oil price on the major exporter. Last year, a surprise January rate cut by the BoC – also in the wake of a tumbling oil price – triggered speculation the RBA may follow suit. Only one bank tips a cut in 2016

Of the big four banks, just one – ANZ Banking Group – is bracing for a cut this year.

“Some clouds are gathering over the economic outlook which we believe will result in lower rates in Australia over the second half of the year,” ANZ chief economist Warren Hogan said, anticipating cuts in May and August.

“Recent international financial market instability could be a harbinger of a more difficult world economy.”

The feeling is that if a rate cut is coming, it will be by June. Markets are pricing in an 88 per cent chance of a cut by mid-year.

RBC Capital Markets chief economist Su-Lin Ong suggested a more likely scenario was a rate cut in March, adding that while the Australian dollar had slid to seven-year lows at US68¢, the currency needed to fall further to support the economy.

“A lower currency is helping the economic transition [post-mining boom] but the reality is that Australia needs both lower rates and further currency depreciation,” she said.

Ms Ong expects the cash rate to sit at 1.5 per cent by year’s end.

But former Merrill Lynch chief economist Saul Eslake said a rate cut would only serve to prompt individuals and businesses to borrow more.

“It’s not at all clear that encouraging households to add to what is already a high level of household debt, merely in order to push up property prices even further, would do much good,” he said. “[It] could do some harm.”

Economists suggest the market turmoil, most intense in equity markets, has little correlation to the economy and therefore the RBA’s decision making.

But concerns around a hard landing in China have raised questions about the flow on effect from one of Australia’s key trading partners.

“We watch China like a hawk. Do we think it will fall over? No,” Alan Oster, National Australia Bank’s chief economist said.

Most economists expect Australia’s GDP to track around 2.5 per cent.