August 15, 2019 / 5:11 AM / 5 days ago

Australia's CBA predicts two more c.bank rate cuts by February

SYDNEY, Aug 15 (Reuters) - Commonwealth Bank of Australia said on Thursday it expects two more rate cuts from the country’s central bank by February, as indicators on hiring intentions point to weakness ahead and global trade tensions ratchet up.

Economists at CBA, Australia’s biggest bank by market capitalisation, said in a note they expect one 25 basis point (bps) easing in November followed by a second in February, taking the key rate to 0.5%. Earlier, they predicted just one cut to 0.75%.

The Reserve Bank of Australia (RBA) has delivered a 50 basis point reduction in its cash rate to an all-time low of 1% via back-to-back cuts in June and July. It has pledged to do more if needed.

CBA’s revised expectations match financial market pricing and reflect doubts the government would act quickly to boost domestic demand.

“The leading indicators of the labour market are pointing to reasonable jobs growth. But they are running at a level that suggests progress in reducing labour market slack will stall,” CBA’s economics team wrote.

Supporting that view, data on Thursday showed Australian employment surged past expectations in July yet the jobless rate was stubbornly stuck at 5.2% as more people went looking for work.

TOUGH JOBLESS GOAL

The RBA has singled out the labour market as the touchstone for deciding if more rates cuts are needed. It has an aspirational goal of a 4.5% jobless rate, a tough goal given unemployment has been stayed above 5% since March despite strong jobs growth.

Complicating matters, the protracted Sino-U.S. trade war has fuelled fears of a global recession, hammering financial markets overnight and pulling yields on 10-year Treasuries below those on two-year paper. That inversion of the curve has been a reliable predictor of recessions in the past.

Financial markets are pricing in policy easing by all major central banks.

Australia has had some good fortune financially. A recent surge in the price of iron ore - Australia’s top export - and solid demand from China have filled government coffers, letting Prime Minister Scott Morrison promise a budget surplus this year after a decade in deficit.

CBA economists have been arguing for fiscal stimulus, saying there were limits to the benefits of monetary policy as interest rates near zero.

“But with the Australian government wedded to a budget surplus, it looks like the RBA will be forced into lowering the cash rate by another 50 bps in an effort to put downward pressure on the unemployment rate,” CBA noted. (Reporting by Swati Pandey; Editing by Richard Borsuk)

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