ANZ tips RBA to leave 2% cash rate until May

House construction and the wealth effect good for now, but will start to fade, says ANZ Photo: Louie DouvisANZ Bank became on Monday the latest forecaster to adjust its expectations for more cash rate cuts from the Reserve Bank of Australia, citing the stronger-than-expected jobs market and recent lift in business confidence.
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The bank, which has been among the most bearish of the domestic lenders when it comes to the Australian economy, said it now expected cuts of 0.25 per cent in May and August, later than its previous call of February and May. This would leave the cash rate at 1.5 per cent.

The latest adjustment to its outlook follows a surprising surge in new jobs in November, which left the official unemployment rate at 5.8 per cent, down from 5.9 per cent in October.

Business and consumer confidence have also enjoyed a boost from the replacement of Tony Abbott by Malcolm Turnbull as Prime Minister in September.

ANZ is the last of the big four lenders forecasting further easing from the RBA, although a few global investment houses have not ruled out more cuts.  Housing and dollar drag

However, co-head of Australian economics Felicity Emmett said on Monday some of the current drivers of economic growth, including house construction and the related wealth effect on consumers, would not fade as quickly as believed earlier.

“The recent run of positive data on the labour market and business surveys precludes the RBA from moving as early as February, as originally anticipated,” Ms Emmett said.

“But the key arguments that we identified as supporting the case for rate cuts remain valid,” she said.

“In particular, slower growth in the housing sector, less stimulus from the depreciating Australian dollar, and sub-par global growth will all contribute to slowing economic growth in Australia in 2016.”

The housing slowdown would not only hit activity in construction and related businesses as demand softened, “but prices are coming off as well and that has an impact on consumer spending”, she said.

Among the foreign investment houses still expecting cuts in 2016, Nomura backed off a little recently on its call for a February cut, to 1.75 per cent, citing the jobs surprise. However, like ANZ, it remains cautious on key growth drivers, the state of China, and on the possible market upheaval if, as expected, the US Federal Reserve lifts interest rates this week for the first time in almost a decade.

“We have flagged risks to the timing of our February rate cut call and must now acknowledge that this has risen,” the bank’s rate strategist for Australia Andrew Ticehurst wrote last week.

“However, while acknowledging this release, and more mixed domestic activity indicators, we remain mindful that other parts of the global economy are underwhelming.

“We also believe that the risk of serious market dislocation, perhaps after a Fed lift-off, is relatively high.”  Investment remains weak

UBS also noted on Monday that despite positive signs for the economy, investment remained weak, income was under pressure and export prices continued to flag.

“Consumer spending and job security have strengthened, and housing construction activity remains buoyant,” economist Scott Haslem said.

“But for every silver lining, Australia almost invariably faces a cloud.

“Leaning against solid growth in consumer and housing is an 11 per cent fall in capital expenditure that shunts domestic growth to just 0.5 per cent year-on-year,” he said.

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