The developments over the weekend have prompted us to move our RBA 25 basis point rate cut call from April to March; expect a further cut in April and lift our FOMC rate cut call for the March meeting from 25 basis points to 50 basis points.
After the developments of the weekend we now expect the RBA to cut the cash rate by 0.25% at its meeting on March 3 and the FOMC to cut by 0.50% at its meeting on March 17/18.
On Friday we published our outlook for RBA and FOMC policy.
We confirmed our forecast for an April cut from the RBA and moved forward our first cut from the FOMC from June to March.
Over the weekend there have been major developments:
- Following a further 900 point sell off in the US share market on Friday FED Chair Powell made a highly unusual unscheduled intervention, near the close of trading, noting that: “We will use our tools and act as appropriate to support the economy”.
- This statement is likely to be seen as a “call to action” for other central banks around the world.
- The Chinese PMI’s were released for February showing a plunge to 35.7 (from 50 in January) in the manufacturing PMI (even lower than the previous record low of 38.8 in November 2008 – during the GFC); the non-manufacturing PMI fell from 54.1 to 29.6. Both these levels were significantly below formal market expectations.
- Reports of meetings over the weekend of Government and Financial Regulators to prepare Australia’s economic defences.
- Market pricing for a 25 basis point cut from the RBA on March 2 has increased from 18% (Australia 5 pm Friday) to 120%.
- Market pricing for a 50 basis point cut from the FOMC in March has moved from 50% (Australia 5pm Friday) to 75%.
- There is reasonable speculation that the confidence hit to the share market and the overall economy we have seen over the last week may impact confidence in the housing market – particularly at the top end of the market.
- Developments outside China around the Coronavirus continue to alarm. (Last five days we have seen cases reported in 20 new countries, with 20 countries now reporting local transmission).
All these developments in this very volatile time mean that we have reviewed our forecasts for the RBA and the FOMC.
We now expect the RBA to cut the cash rate by 0.25% to 0.5% at tomorrow’s meeting.
That is likely to be followed up by a second cut to 0.25% at the April board meeting.
The Governor has previously indicated that he would consider quantitative easing once the cash rate reached 0.25%.
QE has always been part of Westpac’s forecasts but we envisaged the policy starting in the fourth quarter of 2020. These developments are likely to bring that timetable forward to mid year.
We have long argued that the FOMC would cut by 75 basis points over 2020. That reflected our view about a slowing economy coupled with consistent under shoot on inflation.
We now see that 75 basis points being made up of 50 in March and 25 in April.
We expect that given the FOMC’s focus on market liquidity these rate cuts will be supplemented by specific liquidity policies.
A key driver of the more aggressive stance from the RBA will be to ensure the AUD remains competitive. Since the advent of the Corona Virus the AUD has fallen from USD 0.69 to USD 0.65. With the RBA now likely to be more aggressive and the recovery in China likely to be delayed (and coming from an even weaker position, based on the recent PMI’s) we have also lowered our near term (March) forecast for the AUD from USD0.65 to USD 0.63.
