Deutsche: Three more rate cuts by year end

Via Deutsche comes a dove taking flight in the shape of Phil Odonahoe with rate cuts forecast for Sept, Oct and Nov:

“The recent escalation of trade tensions have materially increased the probabilities of a global recession.”

“We think delivering 75bps of easing pre-emptively circumvents the risk of having to deliver 100bps of easing and suffer the negative externalities associated with a defunct overnight cash rate.”

“Better, in our view, to pursue as much conventional easing as possible, as quickly as possible, to fend off those scenarios. It can always be reversed.”

Expect the banks to order the AFR to launch an outright war on rate cuts once we reach a 50bps cash rate. Yesterday CBA confessed every rate cut now costs it $400m and it gets worse as they go lower, previously from Goldman:

…if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins. The sensitivity of margins to falling rates accelerates once the cash rate falls below 1.50% because the various levers the banks have at their disposal become less flexible as the cash rate approaches zero.

Our expectation is that term deposit (and cash management to a lesser degree) pricing will become quite sticky as the cash rate falls below 2.0%, as was the experience in the both the United Kingdom and Canada in 2008/09. This will particularly be the case as the domestic banking regulator, APRA, shifts its focus in 2016 towards the Net Stable Funding Ratio (NSFR), which is likely to place pressure on the banks to both term out and improve the quality of their funding (i.e. preference for deposits over wholesale). Furthermore, we note that the recent move out in funding costs has historically correlated with higher rates being paid by the banks on deposits (Exhibit 2).

We estimate that the replicating portfolio represents about a 5bp p.a. margin headwind for the banks over the next 2-3 years.

Yet the market is already pricing 63bps of more cuts which will be assumed in the new SoMP that lowered inflation and employment outcomes, yet not enough.

Down, down. Then print.

David Llewellyn-Smith

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.

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