RBA – Page 68 – Digital Finance Analytics (DFA) Blog

NAB Expects More Rate Cuts, And Possibly QE

The latest economic summary from NAB, released today, suggests that the immediate impact of Bexit is more benign than was expected. But NAB says the RBA may need to cut the cash rate to 1%, and even try unconventional policies to try and lift growth in the local economy.

Whilst Australian economic growth is expected to remain resilient at 2.9% in 2016 and 2017, despite significant variation across industries and states, the risks to the outlook going into 2018 are becoming increasingly apparent, as LNG exports flatten off at a high level and the dwelling construction cycle turns down.

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. Both global and domestic disinflationary pressures are expected to keep CPI 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.

The economy is then expected to lose some momentum in 2018, which together with the very low inflation outlook, will prompt the RBA to cut the cash rate in both May and August 2017 by 25bps each to a historic low of 1%. Even with this extra stimulus, growth is expected to slow to 2.6% in 2018, and the unemployment rate remain reasonably elevated at 5.6%. Price and wage pressures will remain subdued.

Our forecasts are also dependent on further depreciation in the AUD, although there are significant risks around our view that the AUD will track down to a low of USD69 cents by mid-2017, not least due to the reliance on either a Fed or a volatility-induced rise in the USD, which cannot be guaranteed. A lower iron ore price (as per our forecasts) would also assist the currency.

The composition of the new Australian parliament suggests that achieving consensus on microeconomic and tax reform will be challenging, while the threat of a rating downgrade by S&P will see continued emphasis on fiscal consolidation. This will continue to place pressure on monetary policy and any further deterioration in the growth outlook following the cuts in May and August 2017 is likely to prompt consideration of non-conventional monetary policy tools such as asset purchases.

We now expect the RBA will need to provide further support through two more 25bp cuts in May and August 2017 (to a new low of 1%), which should be enough to stabilise the unemployment rate at just over 5½% and prevent economic growth from dropping below our forecast of 2.6% in 2018.

Monetary policy deliberations may then turn to the possible use of non-conventional policy measures if the outlook deteriorates further.

Additionally, persistent weakness in CPI inflation could potentially trigger a rate cut even sooner than expected.

RBA Suggests House Price Growth Was Overstated

The latest statement on monetary policy, released by the RBA today, discusses the normal range of issues. However, one point of note is the apparent overstatement of the CoreLogic home price data in April and May.

A range of indicators suggest that conditions in the established housing market have eased this year from very strong conditions over recent years. Housing prices were little changed in the June quarter according to most published measures. In contrast, the headline CoreLogic measure of housing prices recorded very strong growth in April and May in a number of cities, to be more than 5 per cent higher over the June quarter.

Recent information suggests that the strong increases reported by CoreLogic were overstated as a result of methodological changes affecting growth rates for the June quarter.

Here is what CoreLogic told their customers.

As part of continual efforts to improve our analytics, filters which are applied to the CoreLogic hedonic index methodology were updated progressively through April.  Static price filters were previously applied to the hedonic index method which were designed to trim extreme transaction prices from the index calculation.  In April, after a periodic model review, CoreLogic revised the filtering method to be dynamic. 

The model recalibration should reduce index volatility and provide more accurate measurements of capital gains going forward.  Additionally, the price filter adjustment should alleviate seasonal changes that were historically evident in the index series during May and June. 

As a result of these changes, we recorded higher than normal intra-month volatility in the capital city index readings during April and May.  The combined capitals index rose 1.7% in April and 1.6% in May before reducing to 0.5% growth in June and, most recently, 0.8% in July.

The changes are part of a once off project aimed at improving the hedonic measurement of capital city home values.  The next major iteration of improvement will occur over the second half of 2016 as we migrate our indices to the new ASGS capital city boundaries.  This update will involve a revised back series of the hedonic index according to the new geography and we expect to release this to the market during Q4 2016.

The most recent data suggest that housing prices declined in most capital cities in July.

Other timely indicators of conditions in the established housing market continue to point to weaker conditions than last year. Auction clearance rates and the number of scheduled auctions are lower than a year ago and there has been a large decline in the number of transactions in the housing market, which is reflected in the turnover rate. In the private treaty market, the discount on vendor asking prices has been little changed of late, but the average number of days that a property is on the market has increased from the lows of last year.

Total housing loan approvals have been little changed in recent months. Meanwhile, housing credit growth has been steady in the first six months of the year but slower than in 2015, consistent with a relatively low level of turnover and the tightening of lending standards towards the end of 2015. The upswing in dwelling investment, particularly the construction of high-density dwellings, has continued, supported by low interest rates and earlier increases in housing prices. Residential building approvals are lower than their peak of mid 2015 but remain at high levels.

Indeed, building approvals have continued to exceed completions, resulting in the number of dwellings under construction or yet to be completed reaching historically high levels. The work in the pipeline is sufficient to underpin dwelling investment activity for the next couple of years.

Conditions in the rental market have continued to soften over the past year. The aggregate rental vacancy rate has drifted higher to be close to its longer-run average of around 3 per cent and rental inflation is around multi-decade lows, having eased across most capital cities. The Perth rental market is particularly weak, reflecting the slowing in population growth combined with ongoing additions to the housing supply.

Bank executives forced before parliamentary committee for ‘regular health check’

From The Conversation.

Malcolm Turnbull has announced that the heads of Australia’s big four banks will be grilled annually by the House of Representatives economics committee, as the government hits back at the banks’ refusal this week to pass on the full interest rate cut.

Turnbull, who fronted the media with Treasurer Scott Morrison, said the banks “operate under a social licence”. “They are built on a foundation of trust and they have to earn that trust through being open and accountable at all times.”

In what the government dubs a “regular health check”, Turnbull said the banks would appear at least once a year “to give a full account of the way in which they are managing their affairs, their dealing with customers, their interest rate policy”.

The banks would be regularly accountable to the Australian people through parliament “in exactly the same way as the Reserve Bank and APRA [the Australian Prudential Regulation Authority],” he said. The appearances would be part of the “regular financial calendar”.

The move follows Turnbull’s Wednesday tongue-lashing of the banks for passing on only part of the 25 basis points cut, and the pressure the government has been under from Labor which continues to advocate a royal commission into the banks.

The banks will be required to explain:

international economic and financial market developments and how they were affecting Australia

developments in prudential regulation, including capital requirements, and their effect on Australian banks’ policies

the costs of funds, impacts on margins, and the basis for bank interest rate pricing decisions

how individual banks and the industry as a whole were responding to issues previously raised in parliamentary inquiries through their package of reforms announced in April

bank perspectives on the performance of the Australian economy.

Continuing his attack of earlier this week, Turnbull said there was “no commercial basis… other than to improve their profitability,” for the banks not to pass on the full rate cut. “They must provide a full account of why they have not done so.”

He said the new requirement “will become, if you are a bank chief executive appearing before the House economics committee, part of your regular annual schedule”. He noted that the committee could have additional hearings and call people back.

Morrison said the government had been in touch with the banks about its announcement and had also consulted with the Reserve Bank and the Australian Competition and Consumer Commission and had advised APRA. “So there’s been an appropriate assessment and consideration of how this process would work.”

The Australian Bankers Association chief executive Steven Munchenberg said the government was entitled to call the banks before a parliamentary committee but noted pointedly that “no other businesses are required to justify their commercial pricing decisions in this way”.

“We are confident banks can explain why the interest rates they set for borrowers are determined largely by the costs of funds and the pressures of a highly competitive market, not the Reserve Bank cash rate.”

He said that in making interest rate decisions “banks have to balance the needs of borrowers and savers, and shareholders in banks, most of whom are also ordinary Australians”.

Opposition Leader Bill Shorten said Turnbull was protecting the banks.

This response was a “cop out” from a weak prime minister who was “in the pockets of the big banks”.

“There is nothing Mr Turnbull won’t do to protect the big banks from a Royal Commission. After giving them a $7 billion tax cut, he’s now inviting them to lunch in Canberra once a year so he can wag his finger at them. This is a friendly catch-up, not an investigation,” Shorten said.

Shorten said that Turnbull was only doing what the banks would let him do. “We know this because he admitted he checked with them to see if this is okay.”

Author: Michelle Grattan, Professorial Fellow, University of Canberra

What’s Really Going On With The Banks’ Rate Moves?

Yesterday, soon after the RBA announced a cut in the cash rate, the big banks started to announce they would pass a portion of the 25 basis points to some mortgages, and also lift some term deposit rates. CBA and NAB were first off the rank, followed by ANZ and WBC. They would have pre-planned a response, by the way.

Lots has been written about how the banks are not passing the full rate on, but much of the discussion is ill informed. So we wanted to bring some perspective to the scene.

First, bank funding and the cash rate have become disconnected, such that changes to the cash rate do not mesh with the real-life treasury rates within the banks. This is partly because banks can access funding from several sources, including deposits, overseas capital markets, bonds and securitisation. You cannot assume an automatic cut in loan rates follows, just as you should not expect credit card rates (which have remained higher for longer) to follow. The RBA “rate lever”is actually quite weak – the dollar went up after!

There are a series of decisions which the banks take, weighing up funding, margin, profit and market/competition issues. They all do this independently, of course, but are functioning within the same market, and tend to act in similar ways – a sign of weak real competition, rather than collusion.

First we need to observe that the yield curve (a theoretical mapping of rates out over the next few years) is very, very low, thanks to an expectation of lower future rates, for longer.

Second, banks want deposits, because in the current uncertain international capital markets environment, they are local, and reliable. Some now have more than 60% of the book matched to deposits, much higher than pre-GFC.

Third, the regulators have been, and continue to push the banks to hold more capital, and capital costs.

Fourth, with demand easing for lending, and the battle centred on refinance and investment loans, banks are cutting their headline rates to get share, and in the process are cutting the once generous discounts from the headline rate.

Fifth, term deposits have a different impact on the bank’s balance sheet compared with call deposits, as a result of changes made last year to the liquidity rules and the upcoming Net Stable Funding rules.

Finally, we know that bad debts are rising, from mortgage defaults, especially in the mining centric states, from consumer debt, and from some corporates. We also know that major corporations are driving margins on their loans lower.

So, with all this in mind, they have to solve the complex equation.

First, they needed to give something to mortgage borrowers, it would be political dynamite not to do so. So they gave away about half the headline rate drop. Then they lifted term deposit rates, partly as a smokescreen, so they could argue they are sharing the gain. Actually, a quick calculation would show that in real dollar terms, giving away more on term deposits costs a lot less than cutting the mortgage rate further. So they can pocket the difference.

But next, for fixed rate mortgages, and term deposits, they are able to lock in generous margins, thanks to the shape of the yield curve. At a stroke, they are able to bolster and protect their absolute margins for the next 2-3 years. This double hedge means NIM is locked in to lift performance.

Some of this margin growth will be offset by the need to lift capital buffers, the rest is available for distribution, after offsetting rising losses, thus keeping dividend payouts in the target band, and so meet – especially investment managers – high expectations.

And there you have it.

AUD Higher After Rate Cut

Once again the market lifted the dollar higher following the RBA rate cut, 14:30 yesterday.

The local action was swamped by US economic news which saw the USD fall against most currencies. Take that into account and the limited pass through of the rate cut to borrowers, and we can conclude the RBA strategy is shot.

On an international basis, the economy here is still quite strong (and much stronger than many others). It is time for economists to stop calling for ever more cuts, when it clearly won’t work. Time for some fresh thinking. Lets ask what will it take to switch lending to business, and get real economic momentum going, rather than more housing loans. Simply cutting rates ain’t working. And we deplete ammunition in the locker should we have a real economic crisis.

Come on RBA, look harder at macroprudential alternatives. Be more creative.

Rate Cut Reactions

From The Conversation.

The Reserve Bank of Australia has lowered the cash rate to 1.5% in an effort to stimulate growth, boost inflation and encourage a fall in the Australian dollar.

The cut of 25 basis points from 1.75% is the last decision from outgoing RBA Governor Glenn Stevens. In a statement on the rate decision he says:

“Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes.”

Professor Richard Holden from UNSW says the cut was needed.

“At 1.0% per annum — well below the target band of 2-3% – there is even the risk of deflation. Growth is relatively weak—indeed, net disposable national income growth has been negative for several years. The labour market is fairly weak as well. All in all, a cut was very much in order,” he says.

In his statement, Glenn Stevens also addressed the concerns around Australia’s property market. He noted Australia’s banks have been cautious in lending to certain sectors like the property market and despite the possibility of a considerable supply of apartments emerging over the next few years, lending for housing has slowed this year.

However Professor Holden says Stevens is downplaying the risks.

“I think that’s something of a blip, and that the housing price inflation risks are very real. I think he called this one incorrectly,” he says.

The Commonwealth Bank of Australia announced it would pass on 13 basis points of the cut to owner occupiers and property investors, Professor Holden says Australians can expect the rest of the big four banks to do the same, apart from ANZ.

Economist Saul Eslake from the University of Tasmania says he still doesn’t believe there is a reason for the RBA to cut rates, as moderate growth and modest expansion in employment weren’t cause for alarm at the last rate cut.

“Inflation is substantially below the RBA’s 2-3% target – but the post-meeting statement didn’t indicate that the most recent inflation data had prompted a major downward revision to the inflation outlook, such as would warrant lower interest rates, as it did when it last cut rates back in May,” he says.

The RBA statement cited international pressures such as China’s slowing economy, but Mr Eslake says this more likely to impact Australia in medium term rather than here and now.

“China has probably done enough to ensure that it meets this year’s GDP growth target of 6.5%. But they’ve done it in a way that increases the risks of a financial crisis down the track – by getting their banks to fund the latest lending splurge (which has helped to revive the Chinese property market)…by borrowing in the wholesale markets rather than through customer deposits,” he says.

Phillip Lowe takes over next month as the new governor of the RBA and he may be faced with limited reserves of monetary stimulus after this cut.

Mr Eslake says reserves might be needed if Donald Trump were to win the United States Presidential election in November.

“If that prospect were to prompt a ‘rush for the exits’ on the part of foreign investors in the US, [it could] send the US dollar substantially lower and hence, possibly, sending other currencies, including the Australian dollar, much higher against the US dollar than the RBA would feel comfortable with.”

Economist Timo Henckel from ANU says the RBA will probably wait a few more rounds before cutting further.

“By historic standard, Australian interest rates are exceptionally low, and economists will want to see how these low rates affect the wider economy, a transmission mechanism that is complex and characterised by long and variable lags,” he says.

Author: Jenni Henderson, Assistant Editor, Business and Economy, The Conversation

RBA Cuts to 1.5%

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.50 per cent, effective 3 August 2016.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers are supporting the near-term growth outlook, but the underlying pace of China’s growth appears to be moderating.

Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

Financial markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term.

Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.

Housing Credit Still On The Up

The June 2016 Credit Aggregates from the RBA, released today, shows that total lending for housing rose $6.6 billion or 0.42% in the month, making an annual rate of 6.7%, compared with 7.3% a year ago. Total loans outstanding for housing were $1,569 billion, another record.

Loans for investment housing rose by 0.1% or $0.6 billion, whilst lending for owner occupation rose 0.6% or $6.1 billion. Again we saw considerable shifts between owner occupied and investment loans in the month due to re-classifications, so there is still noise in the data. That said 35.1% of all housing loans are for investment purposes, down from 35.3% last month.

Business lending fell by 0.11% seasonally adjusted, or $0.9 billion, giving an annual growth rate of 6.6%, up from 4.4% last year. However, the proportion of lending for business fell again to 33.2% of all loans, a worrying continued falling trend. Personal credit also fell a little.

RBA-June-2016-2

Still we see more lending for housing rather than to business. Not good news for the economic outlook.

The RBA notes

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $42 billion over the period of July 2015 to June 2016 of which $1.3 billion occurred in June. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

The Implications of Brexit for Australia

The Council of Financial Regulators (CFR) has issued a report to Government on the potential impact of Brexit on the Australian economy. It takes into account developments up to and including Tuesday 5 July. They conclude that the outcome of the vote on 23 June represented an appreciable negative shock, but the impact on domestic and international financial systems and markets was well-contained and orderly. On the evidence to date, they say it suggests that the domestic and international financial reform agenda adopted following the financial crisis is on the right track.

The CFR is comprised of the Reserve Bank of Australia (RBA); the Australian Prudential Regulation Authority (APRA); the Australian Securities and Investments Commission (ASIC); and the Treasury. The report is informed by CFR agencies’ close consultation with their respective counterparts in the UK, Europe and other jurisdictions.

It is uncertain how the UK’s exit will proceed and what the associated impacts on the stability of the rest of the EU will be. This will be a source of continuing uncertainty and market volatility for some time, against the backdrop of an already fragile global economy. Significant shocks could also come from other sources. While the Australian financial system has weathered the immediate reaction to the vote well, the event underscores the importance of pressing ahead with further reforms to enhance our system’s resilience.

The short-run negative effect on economic activity in Australia, through channels such as reduced trade, lower commodity prices and financial linkages, is expected to be very limited for several reasons. The effect on global activity is expected to be small, Australian trade is oriented more towards Asia than Europe, and Australian banks have limited direct exposure to the UK and Europe and are well-placed to handle disruptions to funding markets.

The medium- to longer-term implications for the UK and Europe, and the global economy more broadly, will depend on the degree and persistence of uncertainty, and the length and outcome of negotiations on exit. In the UK, business investment growth was already weak prior to Brexit and is likely to weaken further, at least until the nature of any future trade agreement with the EU, by far the UK’s largest export market, is known. Some firms may also choose to relocate from the UK to EU countries if their businesses depend on access to the single market. Concerns over job security and negative wealth effects will be a drag on household spending. Prior to Brexit, the IMF indicated that should Britain vote to leave the EU, GDP in the EU could be lower by up to 0.5 percentage points and GDP in the rest of the world could be up to 0.2 percentage points lower by 2018.2 There is a significant degree of uncertainty around the estimated economic impact of Brexit. The IMF forecast a wide variation in output losses across individual economies, reflecting differing trade and financial exposures to the UK, as well as the policy space to respond to negative spill-overs.

Beyond the central forecasts, the Brexit result has arguably added to global tail risks, particularly through heightened risk in Europe. The result could potentially strengthen exit momentum within euro area countries, which if successful would be considerably more disruptive given the common currency. Ongoing banking sector fragility also remains a potential trigger for political discord and financial instability. European banks have been grappling with weak profitability and a high stock of non-performing loans for many years, which has been reflected in low share price valuations. Market movements reflect increased apprehension about banks in a number of European countries post Brexit, most notably Italy, where the Italian Government has been denied permission by the EU to inject capital into its banking system. The newly established European bank resolution framework, which favours bail-in of private creditors and substantially precludes government support, is largely untested.

Overall, tail risk considerations aside, the implications of Brexit for the Australian economy are not likely to be significant, but will depend upon the nature and length of the transition to new arrangements. Australia has proved resilient during past periods of financial market volatility and remains well placed to manage the economic and financial market response from the UK referendum outcome. Additionally, Australia has a relatively small direct trade exposure to both the UK (2.8 per cent of goods and services exports) and the rest of the EU (4.6 per cent of goods and services exports). However, Australia’s major trading partners have larger exposures to these markets. For example, the EU (including the UK) accounts for 15.6 per cent of China’s goods exports and 18.2 per cent of the US’s goods exports. A sharp slowdown in the EU economies with spill-overs into other major economies would place downward pressure on the demand for Australia’s exports.

The Australian economy may also be affected if the UK transition out of the EU is not orderly and uncertainty remains heightened for a significant period. This poses some downside risk to the domestic outlook, with negative wealth and confidence effects having the potential to affect household consumption and business investment.

The strengthening of the banking system’s capital position over recent years to meet the new ‘Basel III’ requirements represents a material increase in the banking sector’s ability to withstand a significant deterioration in asset quality. The Financial System Inquiry highlighted the importance of ensuring the soundness of the financial system. The Government endorsed its recommendation that capital standards be set such that bank capital ratios are ‘unquestionably strong’. While Australian banks are well-capitalised, a further increase in capital ratios is likely to be required over the coming years to satisfy the ‘unquestionably strong’ benchmark. The Government has also endorsed the implementation by APRA, over
time and in line with emerging international practice, a framework for loss absorbing and recapitalisation capacity.

APRA is also introducing further reforms to strengthen the resilience of the banking system. Of particular note, on 1 January 2018, APRA will implement the Basel III Net Stable Funding Ratio (NSFR) to discourage banks from being overly reliant on less stable sources of funding. The NSFR will be part of APRA’s prudential liquidity rules and will complement the Liquidity Coverage Ratio – introduced on 1 January 2015 – that requires banks to hold sufficient ‘high quality liquid assets’ to withstand a 30-day period of stress. APRA is currently consulting with the industry on the design of the NSFR and intends to finalise proposals by the end of 2016.

Consistent with the Government’s response to the FSI, further work is needed to clarify and strengthen regulators’ powers in the event a prudentially regulated financial entity or financial market infrastructure faces distress. A recent peer review by the Financial Stability Board identified some gaps and deficiencies in the Australian resolution framework and work is progressing on this as a matter of priority.

More broadly, such episodes of significant shocks and market volatility reinforce the value of Australia’s financial (and economic) policy frameworks. The separation of responsibility for prudential regulation and market conduct regulation (between APRA and ASIC), the operation of independent monetary policy and a floating exchange rate continue to serve us well.

RBA Will Cut But Currency Will Stay Firm, Says Macquarie

From Business Insider.

The Reserve Bank of Australia (RBA) looks set to cut interest rates aggressively over the next 18 months, but it’s unlikely to result in any meaningful decline in the level of the Australian dollar.

That’s the view of James McIntyre, an analyst at Macquarie Research who has been on the money of late when it comes to Australian interest rates. He believes that additional monetary policy easing from the Bank of Japan and Bank of England, among others, along with a less aggressive rate hike schedule from the US Federal Reserve, will keep the Aussie well supported in the year’s ahead.

“With a diminished outlook for monetary policy divergence the prospects for a lower A$ have weakened,” says McIntyre.

“We remain of the view that the RBA will need to cut rates further, dragged down by a disinflationary outlook. But with easing elsewhere, those rate cuts are unlikely to deliver significant A$ weakness. Rather, rate cuts are now likely to be needed to contain A$ upside. Although the RBA is cutting, we don’t think it will be cutting fast, or far, enough.”

As a result, McIntyre believes that it will be hard for the AUD/USD to break below the 70 US cent level, an area that the currency ventured below earlier this year.

“In the absence of a shock, we think that the hit to global growth and shift towards a less restrictive monetary policy stance is likely to support the A$. A firmer currency will dampen the inflation outlook, and also provide less impetus for economy’s rebalancing,” he says.

As shown in the chart below, supplied by Macquarie, the bank now expects the AUD/USD to bottom out at 72 cents in 2017, a far cry from the 65 cent level seen just three months ago.

Along with hindering Australia’s economic transition (Macquarie now sees GDP growth of 2% in 2017, down from 2.5% forecast previously), McIntyre believes that strength in the Aussie could help to boost migration levels, further exacerbating disinflationary pressures that already exist within the domestic economy.

“We see this as weighing further on the inflation outlook, as the economy will struggle to grow fast enough to keep up with potential, absorb spare capacity, and generate inflation,” he says.

In order to help counteract disinflationary forces, McIntyre believes that the RBA will have to cut rates lower, sooner and for longer than what many in financial markets currently believe.

“We retain our base case for a 25bp August rate and our forecast for a 1% cash rate trough,” he says. “We now expect the RBA will reach that low sooner, in 2Q17.”