Australia’s central bank will cut interest rates to 1 percent within a year to combat weak inflation and rising unemployment and could then turn to unconventional monetary policy, according to Alan Oster, the chief economist at National Australia Bank Ltd (NAB).
Announcing updated rate forecasts in conjunction with the release of last month’s NAB business confidence and conditions survey, which both showed declines, Oster is focused on risks to the economic outlook in 2018, when a lift in natural gas exports levels off and a dwelling construction cycle turns down.
The Reserve Bank of Australia (RBA) “is seemingly less worried than we thought about using up some of its valuable remaining monetary policy ammunition,” Oster said, referring to two cuts in the past four months to a record-low 1.5 percent. “The case for further cuts from the RBA appears to be mounting.”
NAB’s 1 percent rate call joins a growing group that includes JPMorgan Chase & Co, Morgan Stanley and Macquarie Bank Ltd. Prior to the Aug. 2 cut, the lender had forecast a 1.75 percent rate through the third quarter of next year.
To stabilize the jobless rate at about 5.5 percent, the RBA will need to provide further medium-term support through two more 25-basis-point cuts in May and August next year, Oster said.
“And thereafter raises the prospect of the RBA thinking about the use of nonconventional monetary policy measures,” he said.
Australia’s central bank has studied the examples of unorthodox policy conducted by its peers, and would favor a multipronged stimulus if economic conditions unexpectedly deteriorated.
While the RBA says the chances of considering unconventional steps is “very remote,” incoming RBA governor Philip Lowe — who takes the helm next month — has indicated that lowering the rate on its own would lose effectiveness as it approaches 1 percent.
“The outlook for inflation remains very subdued,” said Oster, a former Organisation for Economic Co-operation and Development and Australian Department of the Treasury official who expects the consumer price index to remain below the bottom end of the RBA’s 2 percent to 3 percent target until mid-2018.
“Most of the factors currently suppressing inflation are likely to persist, including low wages growth, strong retail competition both domestically and offshore, low commodity prices globally and slow growth in rents as dwelling supply picks up,” he said.
Oster said that in Friday last week’s quarterly Statement on Monetary Policy, the RBA “appeared to be much more focused on highlighting the downside risks to the outlook,” particularly in relation to the likely direction and degree of spare capacity in the labor market.
NAB’s business confidence survey last month slipped one point to four, compared with a long-term average of six; business conditions — a measure of hiring, sales and profits that reflects the here and now — slipped three points to eight, but still well above the long-run average of five.
The economy is reasonably solid in the near-term, supported by an improved non-mining economy — particularly with strong growth in residential construction — and increased hard commodity production, Oster said.
That was shown in the business survey, which has consistently shown very high levels of conditions and positive confidence, “despite some large external shocks, such as the Brexit vote,” he said.
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