With the Reserve Bank of Australia focusing on inflation targeting rather than growth or income maximizing, an analyst at Macquarie anticipates 50bp worth of rate cuts (of 25bp each) across May and August. After meeting with investors in the U.S. and Canada to discuss the Australian and New Zealand economic outlooks, James McIntyre of Macquarie Securities (Australia) pointed out in his March 30 research note titled “Australia & NZ Economics: North America trip feedback” that clients appeared to be caught off guard by the move up in the Australian dollar.
Labor market softening could hasten RBA to cut rates
McIntyre notes that the investors' meeting came at a time of heightened interest from investors around Australian macro issues such as election timing, house prices, and the spike in the Australian dollar. The analyst argues that the Australian economy will experience another “muddle through” year in 2016. He points out that some of the key points of interest around the economy for clients include: how labor market dynamics were playing out, the timing of RBA cuts and the elevated A$.
McIntyre points out that there was no real perception from the clients that the RBA would not be cutting rates, though the issue is one of timing. The clients were eager to know why the RBA is behind the curve. The analyst cites the RBA's inflation targeting mandate for his prediction of 50bp of rate cuts across May and August.
The analyst believes the softening in the labor market supports the view that the RBA will cut rates later this year. However, he notes that the current sub-6% unemployment rate will add a degree of risk to his forecast for the RBA to resume easing in May. The analyst points out that the consensus has moved to cuts in August, though the RBA could still trim in May. However, the analyst notes that the key catalysts required to pull the RBA over the line in May are a pickup in the unemployment rate to at least 6% and an A$ remaining above US$0.76. The analyst believes the dovish turn by the Fed and firmer commodity prices were a further A$ support:
