MS: RBA to cut in March and May

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From Morgan Stanley:

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RBA rate cuts – three times lucky: Now the RBA has re-opened the easing cycle, we believe the cash rate will be taken another 50bp lower over 1H15 to a trough of 1.75%. We now look for a sequential 25bp cut in March, a pause in April to gauge sentiment and see the 1Q15 CPI, before a final cut to 1.75% in May. Consensus has moved to a low of 2.00%.

Asking more from the AUD depreciation: The RBA acknowledged the income shock from sharply weaker commodity prices and weaker non-mining investment. We also believe the Bank has put more faith in macro-prudential policies to contain the housing market, opening the door for lower cash rates. Finally, the need for a weaker AUD has received more focus in RBA statements, and our Currency Strategy Team has cut their AUD/USD forecast to 0.69 at year-end (see FX Pulse: Closing USD Longs, 6 February 2015).

Market misinterpretation of RBA outlook: The RBA cut their 2015 GDP and inflation forecasts, but sees growth and inflation around trend in 2016. The AUD traded up on the news, on the view that the RBA may see one 25bp cut as enough to deliver this outcome. Instead, we point out their assumption that “the cash rate moves broadly in line with market pricing as at the time of writing”. In other words, the RBA sees lower cash rates (1.90% pricing for end-2015) as consistent with weak 2015 growth and a gradual recovery.

Having cooled off from my own disappointment at the SoMP revisions, I’d agree that a March cut remains likely. I’ve previously said more cuts in the second half too, but it could be May. Whatevs, the cuts will just keep on coming as iron ore keeps on falling.

It’s really that simple.

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.