Westpac Confirms Much-Anticipated Cash Rate Cut by RBA at October Meeting

At the dawn of the day on 23 September 2019, Westpac Banking Corporation (ASX: WBC) affirmed the previously announced forecast released in July 2019 regarding the possibility of a cash rate cut by 25 basis points during the Reserve Bank of Australia (RBA) meeting on 1 October 2019.

In July 2019, RBA Governor, Philip Lowe, had remarked that the central bank may continue to slash the cash rate further in the coming months to support the ailing economy. This followed two successive reductions in the rate in June 2019 and July 2019, respectively, bringing the interest rate to an unprecedented low of 1%, with market participants anticipating that the borrowing cost would remain low for some time to come. At that time, Mr Bill Evans, Chief Economist at WBC, had also stated that the predicted timetable for the cuts would be October 2019 and February 2020 as the key economic indicators in Australia continued to demonstrate weak growth and stagnant wages. As a result, the rate cut is expected to be standing at a mere 0.5% by early 2020.

Westpac also added that on 13 September 2019, markets priced an October move by RBA with a probability of 26%, having lost confidence in the same over preceding weeks. However, over the subsequent week (last week), this probability grew to 80% with the most considerable development being the minutes of the September 2019 RBA meeting, providing some boost to the market sentiments.

Global Economic Scenario

During the Monetary Policy Meeting of the Reserve Bank Board on 3 September 2019, the participants highlighted that on the international front, business conditions in the manufacturing sector across various economies had remained subdued with the key event being the escalation of the US-China trade and technology dispute, which had intensified the risk to the global outlook. Meanwhile, unemployment rates remained low in key advanced economies, owing to the resilience of the labour markets. While wages had increased in some countries, there was an uptick in inflation in the United States that could further increase with the prospective increase in tariffs by the United States on the Chinese imports. More on the US China trade war may be READ here.

In general, trading volumes have been on a downfall, globally, on account of low external demand and heightened geopolitical disharmony, that together had contributed to subdued growth in business investment in most prominent economies, including the United States, the European Union countries and the United Kingdom. The weak global trade has also been weighing heavily on growth in East Asia as the trade with China had contracted further in the month of June.

The meeting also discussed the state of the global commodities market with iron ore prices having declined since the previous meeting but were around 40% higher than the prior year. Also, coal and rural commodities’ prices had witnessed some drop over the last few months, while oil and base metal prices remained more or less unchanged.

Current Australian Dynamics

At the home front in Australia, RBA noted information on the labour market to be crucial since the last meeting, along with the latest GDP figures released by the Australian Bureau of Statistics (ABS) for the June 2019 quarter demonstrating the slowest yearly growth in a decade for the Australian economy, ever since the subprime mortgage crisis in 2008-09. Besides, the housing sector in Australia has also been subdued and in headlines with consistent downfall in dwelling prices, reflecting one of the weakest macro-housing scenarios since February 2012 in the country with a low housing turnover. Despite the overall trend, the housing prices in Sydney and Melbourne had experienced a notable growth in August 2019, while auction clearance rates had also risen further.

The GDP growth rate for the June 2019 quarter was a mere 0.5%, supported by a strong recovery in resource exports from earlier supply disruptions, while the Australia economy grew by 1.4% year-on-year. Moreover, according to the ABS capital expenditure survey, the mining investment in the last quarter had improved owing to increased expenditure on machinery & equipment. Meanwhile, the outlook for the construction sector remains bleak.

To the surprise of the members of the RBA meeting, it was observed that the Australian businesses, on a whole, had not been immensely impacted by the slowing international trade environment as much as businesses in other advanced economies, owing to the fact that the Australian exports are mainly directed towards the domestic demand in China and mildly integrated in the global supply chains.

In the June 2019 quarter, growth in consumption was anticipated to have remained low, while retail sales volumes were also weak along with a strong growth in employment in July 2019 and steady wages growth, as per the discussion at the RBA meeting.

Global Financial Markets

The government bond yields are trending highly lower across different advanced economies, including Australia. Besides, there had been heightened volatility and rising risk premiums in global financial markets in August 2019, following the full-blown conflict between the two key economies of the world, United States and China, along with disclosure of disappointing economic figures in Germany and China. The ongoing downside risks to the global economic outlook with the possibility of a recession and subdued inflation, have all culminated into central banks across the world to slash interest rates in the recent few months, with further easing of the monetary policy widely expected.

Consensus Amongst Key Banks

At the backdrop of a myriad of changes sweeping through the global landscape, the RBA concluded the September 2019 meeting with the understanding that low interest rates were the need of the hour in Australia for supporting sustainable growth in the economy towards full employment and achieve more assured progress towards the inflation target.

In addition, market participants are of the view that all the big four banks (Commonwealth Bank of Australia (ASX:CBA), Westpac Banking Corporation, Australia and New Zealand Banking Group Limited (ASX: ANZ), and National Australia Bank Limited (ASX: NAB), are expecting another cut to the economy’s cash rate on 1 October 2019.

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