RBA: Rising unemployment rate to drive more rate cuts – Standard Chartered

Chidu Narayanan, economist at Standard Chartered, expects the Reserve Bank of Australia (RBA) to cut rates three more times this year, versus their previous view of only one more rate cut.

Key Quotes                 

“We see the RBA cutting rates in July, November and December, taking the policy cash rate down to the likely terminal rate of 0.50%. We have expected the unemployment rate to spike in Q3-2019, necessitating RBA rate cuts, since mid-2018.”

“With the RBA now lowering its expectation on the non-accelerating inflation rate of unemployment (NAIRU) to 4.5% from 5% earlier, we believe the required policy action on a rising unemployment rate will be larger.”

“The hurdle to cut rates below 1% is still quite high, in our view – rates are already at historical lows. The RBA will likely require the unemployment rate to rise close to 5.5% before it cuts rates below 1%. We expect this to happen in Q3, as job losses in construction accelerate.”

“As in the current move, we believe the RBA will not act before it is ready to cut rates twice, given the high hurdle to cut. We forecast the policy rate at 0.50% following consecutive rate cuts in November and December.”

“The RBA has been a reluctant rate cutter, which has been a key factor in our call for delayed rate cuts despite our view of a rising unemployment rate. The RBA’s recent shift – acknowledging softness in the economy, suggesting that the NAIRU is likely lower at 4.5%, combined with the global dovish wave – could push them further lower.”