Here comes the bear doves, via The AFR:
Tim Toohey was the local chief economist at Goldman Sachs for more than a decade. Now at major money manager Yarra Capital, Toohey said he expected five quarter-point rate cuts, to 2.6%, by August next year.
Toohey said he had two reasons for this unorthodox position. First, he said, the RBA was too optimistic about the Chinese economy
Toohey’s second argument for aggressive cuts is based on the so-called “neutral rate”– when the cash rate that neither stimulates nor restrains economic activity. What that figure should be is at best a guess.
For years, it was assumed the RBA’s neutral rate sat around 3.5%. Last week, the central bank revised it down to 2.75% – at the very low end of market expectations.
Yep. As I’ve been saying for some time, a 2-handle is inevitable. It may even be lower.
I will add only one word to Toohey’s excellent thesis: Simandou.
The Pilbara killer arrives later this year and ramps up for three years. It will do two things.
First, drive iron ore to $60 for an extended period of time. Second, it will take coking coal down, as less coal is needed for such high-content iron ore.
With the looming gas glut, this looms as a replay of the 2015 bulk commodity crash that ushered in the immigration-led labour market expansion economic model.
As national income and nominal growth fall, what do you think the likely response will be by Canberra this time?
Productivity reform? Pfft.
The immigration-led growth model will be ramped up even higher to help push up house prices and boost consumption.
Rates will probably not have to go as low as they did through 2019, largely because there is no enormous mining capex bust this time.
But they will have to go lower than most economists, Toohey excepted, think.
