ANZ changes rate cut call to forecast October and November RBA cash rate cuts with possibility of single 50-basis-point cut

ANZ has changed its monetary policy call and now expects the RBA to lower the official cash rate by 25 basis points on October 2 to 3.25% and by a further 25 basis points on November 6 to 3% and to maintain an easing bias thereafter.

The bank’s economists Ivan Colhoun and Justin Fabo say there is also some “tactical argument that rather than enact back-to-back cuts as has occurred over the past year, one larger 50-basis-points cut could have a better effect on confidence and possibly in reducing upward pressure on the Australian dollar.

Colhoun and Fabo made the call ahead of RBA governor’s Glenn Stevens' monetary policy statement, which is expected to give further clues as to future rate decisions and direction.

Last week ANZ said the fall in commodity prices and the persistently high Australian dollar had raised the likelihood of an October rate cut, but said a November rate cut was still more likely, with another rate cut in the first quarter of next year and unchanged rates thereafter – though with a bias towards lower interest rates.

Colhoun and Fabo say the RBA is unlikely to wait until the release of September quarterly inflation data (due out on October 24) because underlying inflation is already around the bottom of the 2% to 3% RBA target band.

Among their reasons for forecasting an October rate cut is the smaller impact rate cuts have been having on encouraging households’ appetite for taking on more debt, including mortgage debt.

“While the RBA rate cuts since November last year have lowered actual borrowing rates for households and businesses by around 90 to 100 basis points, arguably the interest rate-sensitive parts of the economy have not and will not react in the same way as over the past decade or two.

“The key reason for this expectation is that the community’s appetite for debt has waned significantly as debt levels have risen, housing prices are no longer seen as a one-way bet, perceived job security has lessened and significant uncertainty remains over the global economy.

“The Westpac consumer confidence survey for September showed that the proportion of households viewing bank deposits as the ‘wisest place for savings’ was the highest since 1974.

“Supported by the relatively muted response of housing market activity and prices to the rate cuts to date, notwithstanding that it’s still early days, we see very little danger in terms of renewed asset price inflation from shifting rates lower.”

They also re-affirmed earlier concerns about the impact of falling commodity prices and the high Australian dollar on the wider economy and further fiscal tightening at both federal and state level.

“The main reason for the change of view is that lower commodity prices coupled with the persistently high Australian dollar will have a significant contractionary effect on the economy.

“With inflation comfortably at the low end of the Bank’s target band, global growth continuing to moderate and leading indicators of unemployment deteriorating, there is no reason for the RBA to wait another month to ease policy and overall financial conditions,” they say.