Westpac's Bill Evans confirms October 1 rate cut forecast

This note is to confirm the RBA forecasts which we released on July 24 that the Bank will cut the cash rate by 25 basis points on October 1 and again by 25 basis points on February 4, 2020.

That call updated our previous call on May 24 when we were the only forecaster (Bloomberg Survey on that day) to argue that the cash rate would fall below 1%.

Over the last few weeks markets had lost confidence in the October view. On September 13 markets priced an October move with a probability of 26%.

We were feeling decidedly lonely with our October call.

However, over the course of last week markets have moved to a 80% probability of this move.

What changed over the week?

The most important development was the release of the September RBA Board minutes.

From our perspective we were encouraged by the sentiments in the minutes.

Following the release of the minutes I wrote:

“The minutes of the Reserve Bank Board’s September meeting contain similar themes to the August minutes but indicate that the Board acknowledges that it is getting closer to its next move on policy.

In August the Board minutes concluded that: “Having eased monetary policy at the previous two meetings, the Board judged it appropriate to assess developments in the global and domestic economies before considering further change to the setting of monetary policy. Members would consider a further easing of monetary policy if the accumulation of additional evidence suggested this was needed to support sustainable growth in the economy and the achievement of the inflation target over time”.

In these minutes there is no reference to previous actions. Arguably reference to previous actions is a clear sign that the Board is content to observe developments whereas not referring to previous actions there is less emphasis on the need to wait.

It is also interesting that the theme that drove the June and July decisions to cut rates: “the Australian economy could sustain lower rates of unemployment and underemployment” was repeated in these minutes whereas that particular theme was absent in the August minutes.

The minutes refer to three “developments that had a bearing on the monetary policy decision”.

- The labour market – strong employment growth was recognised but the unemployment rate had remained steady at 5.2% (recall that the Governor has noted on other occasions that he would like to see the unemployment rate at 4.5%) and that wages growth “had remained low”. Indeed the minutes point out that “the upward trend in wages growth appeared to have stalled”. We are aware that the Governor sees rising wages growth as the key to a sustained lift in spending growth and higher inflation. In addition the minutes noted that “forward – looking indicators had continued to suggest that employment growth would moderate over the following six months”.

- The housing market – it was noted that there was “a turnaround in established housing markets” but from the perspective of economic activity there was “further weakness in dwelling investment in the near term” and low turnover in the housing market meant that “spending on home furnishings and other housing related items was not expected to contribute to consumption growth in the near term”.

- GDP growth – the Board meeting was held the day before the release of the June quarter national accounts. When the RBA released its forecasts on August 9 it was expecting GDP growth in the June quarter to be 0.8%; in the minutes it referred to an expectation of 0.5% due to the weakness of the partials in the lead up to the release. That forecast proved to be correct but the minutes did note that “private final demand was expected to be weak”. (In fact it was flat in the June quarter and down 0.4% for the year! – “weak” is probably an overstatement of the state of final demand).