RBA: A Pre-emptive Or Premature Interest Rate Cut In June?

During a recent speech at the Economic Society of Australia in Brisbane, RBA Governor Lowe hinted an interest rate cut at the June meeting. The Governor stated that a lower cash rate could be a pre-emptive move to support employment growth, facilitating to achieve the RBA’s inflation target. We hold that an RBA cut before the FED does could be premature, and not necessarily pre-emptive. There are three reasons for this. First, the Reserve Bank could end up depleting policy ammunition to counteract harsher headwinds from a more complicated global environment. Second, Australia’s terms of trade have started to recover, which may push the Aussie to an appreciation after the market stops discounting further RBA cuts. Third, China is pushing local governments and SOEs to invest again, specially in infrastructure, which should increase the demand for Australia’s mining sector. Nevertheless, on the back of Governor Lowe’s signal, we expect the RBA to lower the cash rate by 25-bps to 1.25% at the June meeting. Furthermore, given our scenario of a 25-bps rate cut by the Fed in December, the Reserve Bank may follow with one more move in December, and lower the cash rate all the way to 1.00%. The latter, however, will depend on the recovery of Australia’s labor market as well as China’s situation and its impact on Australia.