Experts, including analysts and economists from Moody’s and Saxo Bank, seem to have reached a census, agreeing that the bushfires wreaking havoc on the economy has close to guaranteed a February rate cut.
Morgan Stanley believes the RBA will need to provide further support post-fires, saying the government will need to move into deficit to “provide a meaningful income tax stimulus at the May budget”, following reduced budget forecasts and increased bushfire spending.
“We have not detected a shift in messaging consistent with this, and so think a smaller scale stimulus consistent with broadly balanced budgets is more likely at this stage,” the analysis stated.
“In response to this we expect the RBA will have to provide more support, and add another rate cut in August in addition to our existing February cut, to leave the cash rate at the lower bound of 0.25 per cent.”
The two further rate cuts would follow the RBA’s significant policy shift in 2019, where it made three slashes to its current historic low of 0.75 per cent.
As noted by Morgan Stanley, the economic response has been “patchy” so far and below initial expectations, which could beg to ask whether more stimulus is needed.
But, it has declared the conditions for a move to unconventional measures have not been met, with “the RBA specifying a high bar for QE implementation”.
The analysts stated there would have to be a sustained slowdown in unemployment and inflation for the RBA to jump start unconventional policy, adding there is widespread scepticism of the effectiveness of the measures even for Governor Philip Lowe.
According to the analysis, three factors will all be key to Australia’s cash rate outlook: credit growth, the labour market and fiscal positioning.
But, as the ongoing bushfires batter the economy and consumer confidence drops, the analysts have guessed near-term growth will remain below trend the RBA’s forecasts.
For credit growth, considered an indicator for sustained recovery, Morgan Stanley has forecast a “shallow trough” by mid-2020.
It expects in response, the labour market will weaken further and for unemployment to rise above RBA forecasts in the first half.
Both factors are tipped to trigger further stimulus.
“A situation where the unemployment rate increased up to 6 per cent would likely be enough of a deterioration to get the RBA worried enough about downside feedback loops (and recession) to implement some sort of unconventional policy,” Morgan Stanley commented.
“The RBA is unlikely to implement QE to speed up the rate of improvement, notwithstanding the fact that they remain relatively far away from their targets. Therefore the fact that we expect improvements in GDP, unemployment and inflation over 2H20 and 2021 is important.”
