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3 Mar 2015
Australian rates still likely to be cut to 1.5% this year - Capital Economics
FXStreet (Bali) - According to Capital Economics, Australian rates are still likely to be cut to 1.5% this year, despite today's pause.
Key Quotes
"We believe that the Reserve Bank of Australia’s decision not to follow last month’s rate cut to 2.25% with another reduction today is just a pause in a loosening cycle that will take rates down to 1.5% by the end of this year. Such a fall below the markets' expectations could prompt the Australian dollar to weaken from US$0.78 now to around US$0.70."
"We had thought that the RBA would follow last month's 0.25% cut with another 0.25% cut today. But in the event, the Board appears to have been concerned that back-to-back cuts would stoke the housing
market by more than it could stomach and may create a sense of panic that could reduce confidence."
"February’s rate cut has certainly added more fuel to the housing fire. While this will help the economy in the near term, it could cause more problems further down the road. Since the annual growth rate of bank lending to property investors breached the APRA’s 10% threshold in January, we wouldn’t be surprised to see the financial services regulator soon impose tighter lending standards. The RBA would then presumably feel more comfortable reducing rates more significantly."
Key Quotes
"We believe that the Reserve Bank of Australia’s decision not to follow last month’s rate cut to 2.25% with another reduction today is just a pause in a loosening cycle that will take rates down to 1.5% by the end of this year. Such a fall below the markets' expectations could prompt the Australian dollar to weaken from US$0.78 now to around US$0.70."
"We had thought that the RBA would follow last month's 0.25% cut with another 0.25% cut today. But in the event, the Board appears to have been concerned that back-to-back cuts would stoke the housing
market by more than it could stomach and may create a sense of panic that could reduce confidence."
"February’s rate cut has certainly added more fuel to the housing fire. While this will help the economy in the near term, it could cause more problems further down the road. Since the annual growth rate of bank lending to property investors breached the APRA’s 10% threshold in January, we wouldn’t be surprised to see the financial services regulator soon impose tighter lending standards. The RBA would then presumably feel more comfortable reducing rates more significantly."