ANZ and Commonwealth Bank tip February rate cut
ANZ and the Commonwealth Bank expect the Reserve Bank to cut the cash rate to 4% on February 7 following analysis of the minutes of December Monetary Policy Committee meeting released today.
ANZ economists Ivan Colhoun and Craig Michaels say the minutes indicate that the RBA board cut the cash rate in December on the basis of heightened global risks emanating from Europe after again considering “whether further evidence of Australia's unfolding mining investment boom was cause to leave rates on hold”.
“On balance, given the heightened global risks, coupled with inflation expected to be consistent with the target over the next two years, the board felt that it had scope to reduce the cash rate modestly,” Colhoun and Michaels say.
“The board minutes suggest that the RBA is continuing to ease policy with some caution given Australia's solid mining investment medium-term pipeline, which is in stark contrast to market pricing of aggressive rate cuts. While the board notes the large downside risks stemming from Europe, it will be the evolution of these risks that will be the key for the February decision.
“Importantly, the availability of credit is (so far) much greater than during the GFC, and unless we witness a seizing in credit markets, aggressive policy action by the RBA is very unlikely.”
To gauge future RBA policy, Colhoun and Michaels will be closely watching developments in Europe, the direction of Chinese growth, Asian trade figures and 2011 fourth-quarter inflation data out on January 25.
CBA economist Michael Workman says both the November and December rate cuts were spurred on by the worsening situation in Europe outweighing generally favourable local conditions, most notably “a major investment boom … tied to the reasonably strong Asian growth outlook”.
“In contrast to the strong domestic investment outlook, the uncertainty over the way events may pan out in the EU present a problem for the RBA board when deciding interest rate levels,” Workman says.
“We expect another RBA rate cut in February. We see the same reasons arising that justified the last two cuts. Conditions in the EU are likely to worsen in terms of the growth outlook.
“The ongoing bad news may further weaken already fragile (non?resources) business and consumer confidence measures here, which will play into lower spending, investment and jobs outcomes. The local financial markets remain very bearish on the local economy. They see a cash rate of 3% in mid-2012.”
“Every board meeting in 2012 is, in our view, ‘live’ if the financial markets continue to dismiss the ability of the EU to satisfactorily resolve its debt problems,” Workman says.