MNI PREVIEW: RBA Look Set For June Rate Cut, Market See More

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia looks set to cut its benchmark

interest rate by 25 bps to a record low 1.25% on June 4, as a slowing economy

and sluggish inflation finally pushes policymakers into action.

     The RBA surprised financial markets by not cutting the Official Cash Rate

in May, but leaving policy unchanged next week would be a major shock.

     Governor Philip Lowe all but confirmed the RBA would cut rates May 20,

telling an audience it would "consider the case for lower interest rates" when

they meet in June.

     With the unemployment rate sitting close to an all-time low around 5%, he

said the RBA judged inflation was likely to remain low relative to its 2 to 3%

target and that "a decrease in the cash rate would likely be appropriate."

     Since Lowe spoke, data showed unemployment edged higher to 5.2% in April.

Markets are pricing in what would be the first cut since November 2016 next week

as a near certainty.

     A faltering economy has seen the RBA outlook do a rapid about-face. From a

hawkish stance as recently as late 2018, the Bank's outlook changed to neutral

in February through to dovish in April.

     --SLOWING ECONOMY

     Further underwhelming economic data is expected in the near-term. The day

after the RBA's June meeting, GDP data for the first quarter of 2019 will be

released, with market forecasts suggesting zero growth.

     Expectations of sluggish data have economists looking for a second and

perhaps a third cut, although the RBA has given little indication of its stance

further ahead.

     At the same time, the surprise re-election of Australia's Coalition

Government has boosted business and investor confidence, and its mandate for tax

cuts will deliver some fiscal stimulus.

     Confidence may also be boosted by regulators relaxing requirements for

housing loans, which may help arrest falling house prices.

     A cut next week will also reduce the RBA's future firepower and even a

25bps rate reduction may not underpin an economy at the mercy of overseas

developments. But it does have a few bullets left, having also confirmed it has

modelled potential courses of action if interest rates go to zero and the

economy is still not responding.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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