RBA to cut rates twice in 2020 but no QE – Morgan Stanley

Analysts at Morgan Stanley call for one more Reserve Bank of Australia (RBA) rate cut this year, in addition to the Feb rate cut expectations. However, they said the RBA will not implement the quantitative easing (QE) program to ramp up inflation and growth.  

Key Quotes:

“The RBA will need to provide further support post-fires, saying the government will need to move into deficit to “provide a meaningful income tax stimulus at the May budget”, following reduced budget forecasts and increased bushfire spending.

We have not detected a shift in messaging consistent with this, and so think a smaller scale stimulus consistent with broadly balanced budgets is more likely at this stage.

In response to this we expect the RBA will have to provide more support, and add another rate cut in August in addition to our existing February cut, to leave the cash rate at the lower bound of 0.25 per cent.

Three factors will all be key to Australia’s cash rate outlook: credit growth, the labour market and fiscal positioning.

But, as the ongoing bushfires batter the economy and consumer confidence drops, the analysts have guessed near-term growth will remain below trend the RBA’s forecasts.

For credit growth, considered an indicator for sustained recovery, Morgan Stanley has forecast a “shallow trough” by mid-2020.

A situation where the unemployment rate increased up to 6 per cent would likely be enough of a deterioration to get the RBA worried enough about downside feedback loops (and recession) to implement some sort of unconventional policy.

The RBA is unlikely to implement QE to speed up the rate of improvement, notwithstanding the fact that they remain relatively far away from their targets. Therefore, the fact that we expect improvements in GDP, unemployment and inflation over 2H20 and 2021 is important.”