Australia | Dec 03 2008
By Andrew Nelson
It wasn’t the odds on favourite choice, but the RBA’s 100 basis points cut to 4.25% at its Monetary Policy Board Meeting yesterday surprised no one. This brings the grand total for the current easing cycle to 300bp since September, with the cash rate now sitting at its lowest point since 2002, which was the absolute bottom of the last easing cycle.
If one thing can be taken way from broker commentary in the wake of yesterday’s RBA announcement, it’s that 4.25% is likely to be a long way from the bottom of the current cycle. However, most agree that from this point onwards, the size and speed of the cuts will begin to slow.
Merrill Lynch notes that the RBA has unsurprisingly continued on with its highly aggressive and pre-emptive approach to easing monetary policy in an attempt to forestall the effects of the turbulence in markets and the large fall in asset prices. The latter has undermined individual and corporate wealth. The broker notes the RBA has also confirmed its concern about the impact of an unwinding of the commodity bubble and terms of trade income boom of recent years, which when coupled with diminishing wealth, threatens to further erode demand.
Goldman Sachs JBWere notes the strong correlation between global growth, Australia’s terms of trade and domestic demand growth is a big problem for the RBA. The situation presents a twin headache of a large negative income shock via falling commodity prices and the complexity trying to short circuit a debt deflation cycle. That said, the broker thinks the aggressive easing policy and the largest percentage decline in oil prices since the Great Depression are seeing the groundwork laid for a recovery in economic growth in 2009-10.
With that comment as a precursor, it’s no surprise the RBA’s accompanying statement was all about the global financial crisis and the implications of slowing global growth. Although, the RBA seemed confident not only its, but the recent actions by other governments and central banks was starting to have a stabilising effect. That, and we’ve heard it all before, the Australian economy remained more resilient than other advanced economies.
While some may see a reduction in interest rates as a positive, JP Morgan takes a different tack from most others in the Australian market, taking the view that the extent of the 300bp in interest rate cuts over the last three months suggests a worse than expected slowdown in domestic economic growth. The broker thinks it will be some time before the Australian economy is “out of the woods”.
The central bank confirms this view, indicating financial markets and international economies are still in a fragile and volatile state. This leads the bank to postulate (and brokers to believe) that more cautious behaviour from both households and businesses is likely and that private demand will remain subdued at least in the near-term. This will result in a continuation of subdued economic growth and investment market performances.
However, Merrill Lynch thinks so far, so good, as the aggressive policy seems to be providing major relief on household debt servicing and is driving a significant improvement in housing affordability. All up, the broker thinks a continuation of the current expansionary policy and an expected continuation of government fiscal stimulus will lead to only a mild recession in 2009. This would include the cash rate falling to 3.5% by the end of Q109.
On numbers from GSJBWere, the interest rate cuts since September have resulted in a $500 per month saving on an average mortgage and should the RBA cut to 3.5%, as the stockbroker expects will happen, then by the end of 1Q09 the saving will rise to $610 per month. Nevertheless, the broker thinks the Australian economy is still likely to move into recession through 2H08, but says the seeds have been sown for what will be a significant economic recovery in 2H09.
UBS also agrees with the 3.5% end point of the cycle, but by May 2009 given it expects less aggressive rate cuts lie ahead. UBS expects a further 50bp of cuts in Q109 and now only 25bp in Q2. The broker thinks that by that point demand will begin to be supported by what by that time will be very low cash rates.
Deutsche Bank is in the same neighbourhood and has changed its target from 4.25%, which was just reached, and is now expecting a minimum (or maximum depending on how you look at it) of 3.75%. The broker thinks that with inflation falling sharply and the unemployment rate expected to move higher through 2009, further easing beyond the new 3.75% target remains likely.
ABN Amro economists are of the same view, expecting a low of 3.5% in the first half of 2009, fearing that national income will hit the wall when key bulk commodity prices are renegotiated lower early next year.