Humour giveth and humour taketh away:
ANZ RATE VIEW: REVERTING TO PREVIOUS FORECAST. NEXT RATE CUT NOT UNTIL LATER IN 2013
- Yesterday’s off-the-cuff humour by the Reserve Bank Governor played an important role in our change of view about the probability of an August easing of monetary policy by the Bank. Following confirmation that this was humour by the Bank’s press office (and today by Deputy Governor Lowe), logic dictates that we should revert to our prior assessment, which was that the falling AUD was now playing an important role in easing financial conditions, allowing the RBA to sit pat on the interest rate front for some time. Our view included the expectation that the RBA would eventually come around to the view that further interest rate accommodation would be required by the economy, in spite of the weaker AUD. This was likely to occur later in 2013 (in November), with the balance of risks being for official interest rates to continue falling in 2014 as mining investment wound back more sharply.
- These interest rate views are expected to occur in conjunction with a further fall in the AUD, to USD0.86, by the end of 2014. Indeed, with interest rates having already moved considerably lower, it would not be surprising (and indeed would probably be welcomed by the RBA) for the currency to play more of a role in rebalancing the economy going forward.
- The Governor’s speech yesterday, however, outlined the key challenges we see to Australia’s economic outlook, which will still require a combination of lower interest rates and a lower exchange rate, namely, significantly weaker mining investment and a lack of significant momentum to date in most parts of the non-mining economy, albeit with some encouraging signs in the housing market.
- In summary, ANZ expects the next policy easing to be a 25bp rate cut in November to 2.50% and for the balance of risks to be for lower rates still thereafter.
