Squid calls May rate cut


Goldman Sachs has joined the Bloxham busters:

Australia: Change of Forecast: We now forecast the RBA to reduce the cash rate 25 bp in May

We are changing our RBA cash rate forecast to a May rate cut of 25 bp and continue to expect a further 25 bp rate cut in November (our prior forecast was for a cut in July and November).

The rationale for the change include;

  • In 5 of the past 6 quarters inflation has surprised consensus on the downside and the March quarter’s inflation data revealed a broad-based deceleration in inflationary pressures. Headline inflation rose just 0.4% qoq and trimmed mean inflation rose 0.3% qoq – its slowest since the data became available in 2002.

Inflation has surprised on the downside 5 out of the last 6 quarters

  • Looking forward, inflationary pressures are increasingly difficult to identify.

  • Wage inflation continues to slow, following the earlier slowdown in employment growth and the fall in hours worked. With the unemployment rate expected to move above 6% by early 2014 a period of moderate wage growth can be expected to continue.

  • The resilience of the Australian dollar and the risk that Japan’s more aggressive monetary expansion prevents the A$ from falling will only further extend the period of disinflation from the tradables sector.

  • Declining commodity prices will have the direct impact on inflation of lower input prices and the indirect impact of decelerating national income which will permeate through the economy in the coming quarters reducing nominal pressures in the economy.

  • The forecast decline in mining investment will remove demand constraints in specialised occupations, industries, and regions directly impacted by mining, which will also cascade through to associated industries that have benefited from the boom.

  • Moreover, should a change of government occur in September, the Coalition’s policy of the removal of the Carbon tax will also be disinflationary. However, even without this tax change, it is likely that headline inflation will slow to sub-2% yoy by the September quarter. It is worth noting that the RBA’s current forecast for headline inflation is 3% yoy for the June quarter. As such, we have reduced our inflation forecast by 0.3% for 2013 year average to 2.3% from 2.6% previously.

 Markets are currently pricing a 41% chance of a cut and 53bps over the next twelve months:

Houses and Holes
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  1. ‘The resilience of the Australian dollar and the risk that Japan’s more aggressive monetary expansion prevents the A$ from falling will only further extend the period of disinflation from the tradables sector.’

    Well that isnt going to change. And 25 basis points isnt going to have much impact at all on the AUD in the face of it.

    But all those other things add up to an ‘oh no’ moment. And I reckon that November call may come forward too.

  2. Continually behind the curve! RBA board keep getting it wrong.
    High $A destroying any balance in economy.
    Get rid of the incompetent clowns!

    Lower rates have not caused a race to property as some have wrongly forecast! Rates should be lowered by .5% in May.

    • Lower rates are actually giving us the worst case scenario – more pointless established residence speculation and no meaningful construction.

      Lower rates without macroprud policy improvement with merely head us down the f.over the eu and us travelled.

      Importing the worlds financial repression to create our own private debt binge is moronic.

    • “Lower rates have not caused a race to property ”

      You’re kidding right?

      At auctions on the Sunshine Coast we’ve gone from no buyers attending to not being able to get a car park for miles around.

    • The problem with lower rates is that over time it pushes wages down. The interest rate is the value of work.

  3. I think we’re facing a different animal here.

    Perhaps, if they want to spur consumption, they should raise rates?

    If they do, I will be able to spend more, thats for sure.

  4. We should look forward to the post boom economy – declining nominal incomes and a weakening labour market; weak effective domestic demand, reflected in low momentum in housing and other parts of the consumer economy; deceleration in external growth impetus; weakening investment and profits; chronic imbalance in the external accounts paired with fiscal imbalances and weak public sector revenues; historically high aggregate debt levels across the economy and saturated credit markets; and distorted relationships in financial markets caused by enduring financial repression.

    This is shorthand for post-GFC syndrome.

    We are very far from being alone in this situation and can benefit from comparing the responses of other economies to those we might implement here.

    We have to figure out how to adapt to this environment without provoking a recession and all the destruction that will invite.

    What makes this all the more urgent are the indications that China is now also being drawn into its own version of debt-propelled stagnation.

    For mine, this should be something that transcends politics. But, I suppose, this is expecting too much.

    • Count me with you chief……

      It should transcend politics
      It should be something we can cushion if we learn from what has occurred in like circumstances elsewhere

      But we both know it wont transcend Australian politics, and that politics (reflecting a society and a media) doesnt learn much.

  5. “Looking forward, inflationary pressures are increasingly difficult to identify”-Mr Squid

    Dear Mr Squid,

    Melbourne house and unit prices have “inflated” by $1000 per week for the last 3 months.

    I hope that assists in your search.

    • The vamp squid is cleaning up globally out of financial repression – I cannot believe that anyone would take these opinions as anything other than base vested interest.

  6. “Looking forward, inflationary pressures are increasingly difficult to identify.”

    Should read
    “Looking BACKWARDS, inflationary pressures are increasingly difficult to identify.”

    To anyone looking forwards inflationary pressures are easy to identify.

    I wonder what the hell GS’s interest is in another rate cut? RE or currency exposure?