Goldman Sach’s economics research team has released a note saying it expects two 0.25% rate cuts by the RBA in the next 5 months: one 25bps cut in May and one 25bps cut in July. This would take the cash rate to 1.50%.
Cash markets are already pricing in one rate cut as a certainty by September but the team at Goldman has gone out on a limb with its “two cuts” call.
The thinking behind such a bold call is that the US Fed will raise rates at a gentler pace than previously anticipated. The difference between the US rate and Australia’s rate will lead to an appreciation in the AUD/USD exchange and the RBA will then have to cut rates to take ease the pressure on Australia’s economy (a stronger AUD makes it harder for Australian exporters and Australian business to compete against imports).
This is not the only the reason. The GS team believe inflation figures will less than expected in the next few months and employment figures have been overstated. A fiscal tightening is expected from the Commonwealth Government and Goldman’s Financial Conditions Index is at a level higher than where previous cuts have been made.
This is not the first time the Goldman Sachs team has suggested a change in monetary policy which stands out from the market. In October 2015 the team said a November rate cut was “highly likely” while the market pricing for such a reduction was only suggesting a 40% chance of this occurring.