From Tim Toohey at Goldman Sachs:
In our view, it is highly likely that the other three large Australian retail banks will all soon follow suit.
…Early warning indicators suggest the risk of severe drought in Australia and NZ has risen sharply. With the recent drought stripping between 50-100 bps from economic growth, the risks to our bottom of consensus forecast of 2.0% GDP growth in 2016 remain to the downside.
…The combination of preemptive independent interest rate hikes by the banking system and the emergence of a new and significant threat to Australia’s economic growth comes at a particularly uncomfortable time in Australia’s economic cycle.
The RBA has continued to sound reluctant to reduce interest rates again this cycle although, as late as yesterday, the RBA acknowledged that it retains considerable ‘flexibility’ with respect to interest rates and has long been explicit that it is targeting final lending rates, not a particular cash rate level.
Our prior expectation was that the RBA would reduce interest rates 25bps in November and the banks would retain 8-10 bps of that cut. Following the preemptive interest rate hike by Westpac, we now see the November rate cut as highly likely and a strong case for a further rate cut in early 2016 can now be made.
Tim is a national treasure with more insight than most other banks put together but has been wrong on timing in recent times. Not that that matters, he’s right that more cuts are coming, and more than one.
Indeed, we are going all the way to zero, or Australia’s version thereof, which I guesstimate is 0.75%.
