RBA likely to cut than raise rates, UBS’s Anderson says

Bloomberg

Australia’s central bank is more likely to cut interest rates than raise them if it moves at all this year, while an appreciating local dollar could make economic conditions tougher for industries outside mining, UBS Group AG’s Anne Anderson said.
“Should they need to ease, I think it’s more likely that they would have to take a more aggressive stance and move to 1 percent, so take half a percent off the cash rate,” Anderson, head of Australian fixed income at UBS Asset Management in Sydney, said in an interview with Bloomberg Television Tuesday. The Aussie dollar’s strength “could provide a headwind for our services sector, which is one of the major drivers of our economy,” she added.
Reserve Bank of Australia (RBA) Governor Philip Lowe will announce the outcome of the board’s first policy meeting this in Sydney, with 27 of 28 economists predicting no change from the current record-low 1.5 percent, and one forecasting a cut. Policy makers have shown a greater willingness to tolerate weak inflation as they try to maintain financial stability in an environment of surging property prices in Sydney and Melbourne.
“Certainly house prices have reignited, and that’s an issue from a financial stability perspective so they’ve got no interest in adding to that,” Anderson told Bloomberg TV’s ‘Daybreak Australia’ program. “But nonetheless I think other macro drivers will be more important and override that as we move through this year.”

Subdued Inflation
Australia’s economy unexpectedly contracted in the third quarter, though most economists expect it to have rebounded in the final three months of the year. Meanwhile, weak wage growth as the economy adjusts to the end of a mining bonanza has compressed inflation, which has remained below the RBA’s target for the past nine quarters. A more than 5 percent jump in the currency last month is also likely to keep a lid on import prices.
Looking ahead, markets are pricing in little chance of further policy easing this year, and switch to betting on some chance of a rate increase late in the year. Anderson said while an extended pause was possible, in her view the economic situation could unfold in a way that rates were “more likely to be down than up.”
Back in Australia, the government is trying to cut its budget deficit in order to avoid losing the nation’s AAA rating. Markets worldwide have shown little interest in such downgrades and Anderson reflected that view. “I wouldn’t call it a concern, the probability is greater than 50 percent, but we’re still very highly rated and I think that’s the thing that I focus on, that it’s still very strong,” she said.