- Most in financial markets believe the next move in the RBA cash rate is likely to be higher, but the tide is slowly turning.
- Shane Oliver from AMP today became the first economist from a major institution to say he believes the next move from the RBA will be a rate cut, following weak GDP data today.
- Other economists are also talking about the potential for the next move being lower. UBS says it now "can't rule out a cut" while NAB says it is "reassessing [its] view on monetary policy".
- Financial markets are also losing faith that the next move will be higher.
- With inflation well below the RBA's target and lending standards now tougher, a deterioration in Australia's labour market could stir the RBA to action.
For some time the Reserve Bank of Australia (RBA) has said the next move in official interest rates is likely to be higher.
While the vast majority of those in markets still share this view, the tide is slowly turning, driven by concerns about the outlook for the global economy, and, after today's Australian GDP report, the domestic economy.
Many economists who were calling for rate hikes next year have now pushed back their call for policy tightening into 2020, or beyond.
And today Shane Oliver, Chief Economist at AMP Capital, has broken ranks with the prevailing market view, suggesting the next move in the RBA cash rate won't be higher, but lower, with the risk of more than just one cut being delivered.
"Given the combination of falling house prices, tightening credit conditions and constrained growth, which will keep wages growth weak and inflation below target, we are changing our view on the RBA from being one of rates on hold out to second half of 2020 to now seeing the next move being a rate cut," Oliver said following the release of Australia's national accounts.
"However, with the RBA still seeing the next move as being up it will take them a while to change their thinking so we don’t see rates being cut until second half next year.
"When it does start cutting the RBA will likely stick to 0.25% increments, and since rate moves are a bit like cockroaches, there is likely to be more than one."
Oliver joins Stephen Koukoulas of Market Economics as the only forecaster surveyed by Bloomberg who is calling for the next move in the cash rate to be lower.
However, they may not be the last. A range of analysts today were starting to talk about the potential for cuts -- something that often precedes official changes in forecasts.
"Looking ahead, tighter credit should see falling home prices and a fading wealth effect slow household spending," said George Tharnou and Carlos Cacho, members of the UBS Australia economics team.
"We still see rates on hold through 2020, but can't rule out a rate cut if weak data continues next year, especially inflation and wages."
So two calling for rate cuts could soon become three, depending on incoming data.
Even hawkish forecasters now appear to be wavering on the prospect of rate hikes next year with the National Australia Bank flagging it too may push back the timing of when the RBA will lift rates.
"With growth looking to remain at or above trend, the next move in rates is still most likely up, but with inflation remaining low, any move appears some time away," said Alan Oster, NAB Group Chief Economist, after today's GDP release.
"Following the latest releases of growth, labour market and prices data, we are reassessing our view on monetary policy.
"While growth has turned out broadly as we expected over 2018, inflation has been weaker and the RBA appears more patient. We will release an updated set of growth and rates forecasts next week."
It's not just economists who are starting to have doubts about whether the next move in the RBA cash rate will be higher.
As pointed out on Twitter by Alex Joiner, Chief Economist at IFM Investors, financial markets are also pushing back when they, collectively, expect the RBA to lift rates, putting the probability of a 25 basis point increase by the middle of 2020 at less than 50%.
IB futures aren't buying the #RBA's narrative anymore (OIS tells a similar story), economists that sit on/near rates desks might be finding it a touch harder to pitch the "next move is up" forecast right now #ausbiz pic.twitter.com/3FXvnif5bz
— Alex Joiner (@IFM_Economist) December 5, 2018
One year ago, markets were nearly fully priced for the RBA cash rate to sit at 1.75% today.
Obviously that didn't happen, with the RBA keeping the cash rate on hold for a 28th consecutive month earlier this week.
Put simply, markets, and an increasing number of economists, are slowly losing faith that the next move in the cash rate will be higher, especially should policy remain unchanged well into 2020.
Who knows what the global economy could look like then? It could look fine, or it could look a whole lot worse.
Recent signals from the bond market suggest it could well be the latter.
It would be hard to see why the RBA would lift rates in such a scenario.
Still, based on recent public comments, the RBA still thinks the next move in the cash rate is likely to be higher given an expectation that strong domestic economic growth will lead to a gradual decline in unemployment, and gradual lift in inflation back towards the midpoint of its target, in the years ahead.
"In these circumstances, members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease, but that there was no strong case for a near-term adjustment in monetary policy," the RBA said at its November monetary policy meeting.
However, with Australian GDP growth slowing sharply in the September quarter, many are now questioning whether the economy will expand by 3.5% on average this year and next as the RBA currently expects.
The big 'if'
If the Q3 GDP result is repeated in the coming quarters -- and that is a significant "if" -- it points to the likelihood that recent progress in lowering unemployment and lifting inflation may stall or even reverse.
Should that occur it will be likely that the next move in the cash rate will be lower, regardless of the RBA's current reluctance.
In his maiden speech as Governor, Philip Lowe provided some subtle hints as to what may prompt such a policy response.
“When we find ourselves with inflation that is either lower, or higher, than normal, we want to feel confident that, over time, inflation will return to more normal levels," he said in late 2016.
“There is, however, always a choice about the exact path we take.
“When thinking about that choice, developments in the labour market and in balance sheets in the economy have particular importance.”
For the moment it's the latter that Lowe is focused on -- reducing the risk of financial instability due to the buildup of household debt.
However, should the labour market start to weaken, and with inflation already well below target, it may not be markets who are talking about rate cuts but the RBA governor himself.