Commonwealth Bank of Australia has become the first of the big four banks to predict another two official Reserve Bank of Australia interest rate cuts in 2016, which would take the cash rate to 1.25 per cent.
While CBA’s chief economist Michael Blythe has questioned the Reserve Bank’s pessimistic forecasts for inflation over the next two years, he said the reality is that recent price data has “shocked the RBA and contributed to a fundamental reassessment on how policy makers are thinking about inflation.
“The level of RBA concern is such that we feel obliged to add another cut to our cash rate profile (in November) following the one already pencilled for August,” Mr Bythe said in a note to investors.
There is also a risk that those two cuts come earlier, he said.
In his research note, Mr Blythe challenges the Reserve Bank’s inflation forecasts, suggesting price pressures are likely to be higher than the central bank believes.
He says weakness in non-tradables inflation does not appear to be particularly broadly based, as is claimed by the Reserve Bank; that the downward price effect of lower utilities and fuel has ended; and, that wages are likely to be stronger than expected.
And we’ll have a current account surplus as well as a soaring dollar? I don’t think so!
He’s right about the rates, though.
