September 11, 2019

NAB Change to Rate Call – September 2019

Cash Rate to 0.5% by February; more stimulus by mid 2020 unless the Government steps in.

  • We have changed our view on the cash rate, factoring in an additional rate cut in February to take the cash rate to 0.5%, at which point the Reserve Bank has suggested it would signal its intentions on unconventional policy. We still expect the next cut to be in November, with our forecast of a more drawn-out easing of policy reflecting the cautious nature of Governor Lowe, where the Board has signalled an “accumulation of additional evidence” was required to cut rates again. That said, we are very aware the Bank could cut as soon as October if there was further weakness in the labour market revealed next week.
  • The forecast of lower interest rates reflects increased downside risks to the domestic economy and greater uncertainty about the world economy. Growth continues to undershoot the Reserve Bank’s forecasts, such that unemployment is likely to edge higher, with inflation stuck below the 2-3% target band. Public spending remains strong, but private demand has fallen over the past year for the first time since the global financial crisis. The NAB business survey points to continued weakness in private demand, while our internal data suggest that rate cuts and tax refunds have done little to boost consumer spending in July and August as was hoped. House prices have picked up in a number of cities, which should help limit further wealth effects on consumer spending, but leading indicators suggest that the sharp downturn under way in residential construction could be deeper than previously forecast.
  • Internationally, the escalation in the trade war between the US and China has seen a fall in global trade and manufacturing production that has dragged on world growth. Business confidence has slumped and firms could defer investment in the face of increased uncertainty, which would be an additional drag on growth. Central banks have started to respond with easier policy, which places additional pressure on the Reserve Bank to cut rates further given an appreciating exchange rate would undo some of the benefit of lower interest rates locally.
  • Importantly, we continue to see the need for additional fiscal stimulus, through new infrastructure investment, cash hand-outs and/or the pull-forward of tax cuts. Governor Lowe has repeatedly called for more help from fiscal policy, although to date the government is focused on the political objective of returning the budget to surplus, pointing only to possible tax concessions for business investment in the May 2020-21 Budget. Unless something meaningful is done on fiscal stimulus, we think the Reserve Bank could cut the cash rate further to 0.25% by mid-2020, simultaneously undertaking unconventional monetary policy. Governor Lowe has said that unconventional monetary policy would most likely involve buying government bonds, but we anticipate additional steps, such as long-dated repurchase agreements to lower bank funding costs, given the Bank has previously said a mix of policies is more effective based on international experience. The exact mix would likely be determined depending on economic and financial conditions when short-end rates move below 0.5%.

For further details, please see the NAB Change in cash rate call – September 2019.