Australia: More rate cuts and QE on horizon

RBA

Australia’s central bank could follow last week’s cut in its official cash rate to a record low of 1.5% with more reductions and might even follow the US and Europe by introducing monetary easing, according to the National Bank of Australia’s (NAB) economists.

In a revised forecast NAB now sees two further rate cuts by the Reserve Bank of Australia (RBA) to 1% over the year ahead and “the possibility of unconventional monetary policy.”

In its monthly business survey, NAB maintains a positive short-term economic outlook for Australia, but warns that evidence of longer-term risks for Australia is more evident as demand from economies such as China for liquefied natural gas (LNG) and other commodities eases and the pace of new housing construction slows.

“Against these headwinds, the economy may require additional policy action to support growth, especially if the RBA hopes to see inflation return to within its 2-3% target band,” said NAB’s chief economist Alan Oster.

“Both global and domestic disinflationary pressures are expected to keep inflation below the target band for an extended period, while structural shifts in the economy and modest economic growth risk upward pressure on the unemployment rate.

“We now expect the RBA will need to provide further support through two more [0.25%] cuts in May and August 2017 [to 1%], which should be enough to stabilise the unemployment rate at just over 5.5% and prevent economic growth from dropping below our forecast of 2.6% in 2018.

“And thereafter raises the prospect of the RBA thinking about the use of non-conventional monetary policy measures if the outlook deteriorates further.”

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