Alan Oster, Chief Economist for NAB Group, predicts two cash rate cuts in 2019

Growth appears to have lost significant momentum, placing at risk further improvement in the labour market at a time when inflation poses little constraint on policy and financial stability risks have abated.

We have pencilled in one 25bp cut to 1.25% in July and a further 25bp cut to 1% in November.

We see the timing of a rate cut as very data dependent; any deterioration in the labour market would lead to cuts and this could happen earlier than the financial market currently anticipates.

If, as we expect, the loss of momentum in private-sector activity seen in H2 2018 continues, then there is unlikely to be much improvement in the labour market despite its resilience to date. This view is reinforced by the forward indicators in the NAB Business Survey pointing to continuing (if not further) weakening. That is especially so for private consumption and the residential construction cycle.

This means the RBA outlook for a further fall in unemployment to gradually lift wages and ultimately inflation is increasingly in doubt. We therefore expect the RBA to provide some further support to the economy in the form of lower interest rates.

Determining the timing of such moves is much more difficult, but we are forecasting two 25bp cuts in July and November. In this respect, we note that the RBA is independent and the political cycle should and will be irrelevant to the timing of a rate cut.

With monetary policy being forward looking, we think the RBA will act this year on a “no regrets” basis to boost economic activity and to offset a likely (on our forecasts) increase in unemployment in 2020. It is possible that further policy adjustment will be required in 2020.

  • The Q4 national accounts confirmed that the  downturn in the residential construction sector is likely to be as sharp as we had previously forecast and similar in magnitude to the early 1990s recession.
  • Consumption growth has remained weak, alongside only modest growth in household income.
  • The NAB Monthly Business Survey showed that the business sector lost significant momentum through the second half of 2018.
  • The only part that had maintained strong momentum is employment.
  • Wage growth is predicted to lift to around 2½ -2¾% by the end 2020.

What developments would allow the RBA to continue to keep interest rates on hold?

Chiefly, if the unemployment rate remained low – or declined further – in spite of ongoing weak consumption growth and the downturn in housing construction. That seems unlikely.

 *source Property Observer – Alan Oster

Posted in News on 11th March, 2019