Via Damien Boey at Credit Suisse today:
Overnight, RBA Governor Lowe gave the strongest indication yet that the Bank is likely to cut rates when it next meets in early October. Notable arguments included:
- Australian rates being captive to global forces such as a global “saving glut” suppressing global rates, notwithstanding the flexibility of the AUD.
- Room for opportunistic reflation, because the unemployment rate is well above the Bank’s new estimate of the natural rate of 4.5%.
- The gentle inflection point upwards in the economy over the next few quarters potentially not being fast enough for the Bank’s liking.
- The Bank being prepared to cut rates further to achieve more “assured progress” towards growth and inflation objectives.
If the RBA cuts rates in October, historians and market commentators will be able to pinpoint the October decision as the moment when the Bank really capitulated on its macro-prudential mandate, and took ownership of the housing bubble. The evidence is that rate cuts are working, and more effectively than most people could have imagined at the turn of the year. The economy does not need more rate cuts. And for a long time, RBA officials took the same view given the strength of the terms of trade, and longer-term system stability considerations. But now, what Lowe is saying is that the Bank is prepared to cut rates because:
- Global bond market pricing is telling everyone to cut rates.
- The Bank has changed its mind on the trade-off between short-term growth and long-term stability. Apparently, short-term gain now matters more than long-term pain.
- The floating AUD/USD is not all that is cracked up to be, as the insulator for the economy against global shocks.
