Australia | Oct 11 2008
By Chris Shaw
Along with almost everyone in the market Standard Chartered was caught by surprise by the decision by the Reserve Bank of Australia (RBA) to cut interest rates by a full percent earlier this week, as it hadn’t expected a 6.0% official rate until around the middle of next year.
But the group can see the justification for the move as the ongoing global financial crisis is causing credit market conditions to tighten even further, to the extent Australian bank bill rates have actually risen in the month since the RBA took 0.25% from the official cash rate early in September.
Just as important a reason for the move, however, is lower economic growth assumptions, as on the group’s revised numbers GDP growth in Australia in 2009 will come in at just 1.1%, down from a previously revised-down forecast of 1.8% in 2008. The upcoming few months should be when growth is at its weakest, Standard Chartered’s estimates, suggesting in the December quarter Australia’s GDP will contract by 0.3%before growing at just 0.1% in the March quarter next year.
[The IMF suggests 2.5% growth for Australia. See “IMF Says Recession Yes, Depression No”; Economics; 09/10/08]
As policymakers attempt to deal with this slowdown the group expects further action from the RBA and is forecasting an official cash rate in Australia of 5.5% by year’s end on the way to rates at 4.5% sometime next year.
Supporting such a move is the group’s view the Chinese economy will provide less support for the rest of the world than had previously been thought. It expects China will actually post negative growth in exports in 2009, which will flow though into negative implications for investment, consumption and unemployment.
Standard Chartered is currently forecasting 7.9% GDP growth for China in 2009 and 7.1% in 2010, but takes the view risk here is to the downside and further cuts to this number may be required. Given China’s inability to support for the global economy it is clear the world will face a deeper and longer slowdown than had previously been expected, hence the global rate cuts this week.
Post the move by the RBA and the globally coordinated actions of other central banks this week Standard Chartered suggests there is now extra pressure on the Reserve Bank of New Zealand (RBNZ) to follow suit and lower rates in that country, especially as the Kiwi banking system relies even more on external funding than does the Australian banking system.
The growth outlook for the New Zealand economy is equally as poor, with the group revising down its 2008 forecast to GDP growth of just 1.0%, rising only marginally to 1.3% in 2009.
This should ensure a response from the RBNZ with the group forecasting a 0.75% cut when the bank next meets later this month, to be followed by a further 0.25% cut at the December meeting. While this would bring rates back to 6.5%, the combination of a high current account deficit and upcoming fiscal expansion will limit the RBNZ’s ability to cut rates as aggressively as its Australian counterparts. This leads Standard Chartered to suggest rates will only fall to 5.75% by the middle of next year.