Morgan Stanley: 45% chance of rate cut

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From Morgen Stanley:

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RBA loses another friend in the ‘hold’ club: The RBA is increasingly standing out as a pillar of monetary stability, with the PBoC becoming the third major economy to join the ECB and BoJ’s 2H14 easing, in addition to Korea in the region. Outside of high-inflation India and Indonesia (which recently hiked rates to 7.75% following the fuel subsidy cut), it is only the RBNZ that has been charting a course towards tighter monetary policy – but even here, market pricing of further rate hikes over the next 12 months has fallen from 40bp to 20bp.

Imported deflation, and delayed rebalancing: This leaves Australia as an importer in the global trade of deflation, particularly through the AUD’s resilience against the important EUR, GBP and JPY crosses. For consumers, this buffers the household income shock through the growth transition from the resources boom, particularly when combined with a fall in oil prices that frees up an additional 0.5ppt of income at spot prices. However, it also impedes the rebalancing of the economy towards tourism and other trade-exposed industries, and the resulting downward pressure on inflation and employment increases the calls for further RBA rate cuts.

Earnings and growth at risk: We have lifted the probability of further rate cuts to 45%, but our base case still has the Bank holding rates at 2.5% and tolerating inflation at the bottom of the target band, and unemployment rising towards 7%, so long as housing conditions remain firm. In our view, this presents real earnings risk for domestic industrials, as growth conditions will need to deteriorate before any substantial shift in monetary or (more likely) fiscal policy is triggered.

I put the chances of a rate cut at more like 80% and of two at 60%, assuming we get macroprudential.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.