NAB Expects RBA To Cut Cash Rate In November 2019

Australia’s leading banking group, National Australia Bank Limited (ASX: NAB) recently released a report, in which it communicated that it is expecting RBA to cut the cash rate in November 2019.

The cash rate is basically an interest rate, which a Central Bank charges on overnight loans to commercial banks, allowing it to adjust the interest rates that applies in the country's economy. Therefore, any change in the cash rate by a Central Bank will have a huge impact on the economy.

Cash Rate Forecasts (Source: NAB Reports)

NAB has said that the forecast of further reduction in interest rates reflects its judgment that the economy is losing momentum, which is apparent in the private demand as it has barely grown over the past year.

In the graph below, we can see how time and again, RBA has changed its cash rate in the past decade.

(Source: RBA Reports)

On 4th June 2019, RBA’s Board announced that it has decided to lower the cash rate by 25 basis points to 1.25 per cent to support employment growth in the country. Further, the reduction was aimed at providing more confidence that inflation will be consistent with the medium-term target, assisting in making further inroads into the spare capacity in the economy.

The decision to reduce the cash rate was also taken into consideration to fast-track the progress on reducing unemployment in the country. Although the RBA made significant downgrades to its growth outlook in the February and May Statements on Monetary Policy, NAB believes that the RBA’s forecasts are still too optimistic, and it expects further downgrades by the Bank as the year progresses.

The idea of further reduction in the cash rate by RBA is coming from the fact that the economy is losing momentum with a weaker labour market and entrenched weakness in spending. National Australia Bank believes that the Australian economy is weaker than what RBA currently expects, therefore is stressing on the idea that RBA should get on with the cutting cycle to combat the slowdown in the economy and reduce unemployment.

RBA is expecting a third rate cut to 0.75% in November to reduce the real cash rate, where expected inflation, as proxied by the 10-year breakeven inflation rate, has fallen back to its multi-decade low of 1.4%. With the increased investment in the infrastructure and a pick-up in activity in the resources sector, the Central Bank of Australia currently expects that the Australian economy will grow by around 2¾ per cent in 2019 and 2020.

NAB believes that the RBA may be reluctant to cut the cash rate third time given what Governor communicated in 2012 that the effective lower bound for the cash rate was 1%, plus or minus a bit, although he recently cited the experience of much lower interest rates in the US, UK and Canada.

Currently, the Australian economy is witnessing a weaker labour market, with slow employment growth and an upturn in the unemployment rate, reaching 5.5% by the end of 2021. As a result, NAB is expecting wages growth to remain weak and inflation to return to the bottom of the RBA’s target band by the end of 2021.

NAB believes that additional fiscal policy action by RBA will be required to provide a boost to the economy. Governor Lowe has called for increased infrastructure spending and structural reform, which NAB believes would be helpful as both of them would boost the demand and supply equation in the economy. It is believed that the global backdrop will also influence the RBA’s views, as trade tensions between China and the US remain unresolved and the Federal Reserve is now forecasted to cut rates this year.

In the last six months, NAB’s stock has provided a return of 12.03% and at today’s market close (14th June 2019), it was trading at a price of $26.730, with a market capitalisation of circa $75.91 billion. NAB’s stock is trading at a PE multiple of 13.160x, with an annual dividend yield of 6.74%.

One of Australia’s top four leading banks, Westpac Banking Corporation (ASX: WBC) witnessed a slight decline of 0.889% in its share price during today’s intraday trade. Earlier, Westpac forecasted two rate cuts in August and November 2019, and also speculated that the RBA could embrace some form of quantitative easing (QE) rather than driving the cash rate below the 0.5% to 0.75% range.

In the last six months, WBC’s stock has provided a return of 10.57% and at today’s market close (14th June 2019), it was trading at a price of $27.880, with a market capitalisation of circa $96.98 billion. WBC’s stock is trading at a PE multiple of 13.650x, with an annual dividend yield of 6.68%.

Today, S&P/ASX 200 Financials were down on ASX by 0.83% with AMP Limited (ASX: AMP), a leading financial services company, witnessed a decline of 5.804% in its share price during today’s intraday trade. Today, AMP threw more light on an announcement by the Australian Prudential Regulation Authority (APRA) regarding the imposing of directions and additional conditions on the Registrable Superannuation Entity (RSE) licences of AMP’s superannuation trustee. The group has announced that it will fully implement the directions and additional conditions and assured that it has already taken action on the number of the issues raised. With the new trustee operating model and expansion of superannuation trustee boards, AMP is seeking ways to strengthen the independence of the trustees.

Earlier in May 2019, AMP announced the appointment of highly experienced John Patrick (JP) Moorhead as Chief Financial Officer of the company. Mr Moorhead currently is the CFO and COO of AMP Capital and will start his new role as CFO from 1st June 2019. Mr Moorhead is an experienced finance veteran, who held various senior roles with big companies like Virgin Group, Eight Roads, Goldman Sachs.

In the first quarter of 2019, Australian wealth management’s AUM (Assets Under Management) increased 5% to $129.3 billion, with net cash outflows of $1.8 billion. Further, Australian wealth management reported cash inflows of $4.69 billion and cash outflows of $6.46 billion.

AMP’s stock was trading at a price of $2.110, with a market capitalisation of circa $6.6 billion as on 14th June 2019. In the last six months, the stock of AMP has provided a negative return of 2.18% as on 13th June 2019.

Australia and New Zealand Banking Group Limited’s (ASX: ANZ) stock was down 0.739% during today’s intraday trade, closing the trade at a price of $28.220, with a market capitalisation of $80.55 billion as on 14th June 2019. ANZ’s stock is trading at a PE multiple of 12.980x, with an annual dividend yield of 5.63%. In the last six months, ANZ’s stock has provided a return of 11.53% as on 13th June 2019. Along with ANZ, Commonwealth Bank of Australia’s (ASX: CBA) stock was down 0.808% during today’s trade. At market close, the stock was trading at a price of $79.770, with a market capitalisation of $142.36 billion. CBA’s stock is trading at a PE multiple of 15.670x, with a dividend yield of 5.36%. In the last six months, CBA’s stock has provided a return of 14.59% as on 13th June 2019.

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