Chief economist update: How low will Lowe go?

RBA rate cut expectations strengthened after the release of worse-than-expected Australian labour market report.

Duh! If financial markets were waiting for the jobs report to raise the odds of another Reserve Bank of Australia (RBA) rate reduction, they're too late. The only question that needs to be answered is how low would RBA Governor Lowe go?

The more rate cut writings were splashed all over the wall since the last rate cut in October. Historically, the A$ falls to the occasion whenever there's trouble in foreign shores.

The A$/US$ sank from US$0.80 to below US$60 during the Asian financial crisis; it fell from around US$0.65 to US$0.49 during the US recession in 2001 and following the September 11 attacks of the same year; and, it dropped from US$0.91 to US$0.62 at the onset of the GFC.

The A$/US$ exchange rate has currently fallen to US$0.6786 (following the jobs report) but it has risen and remains above the US$0.6704 low plumbed after the RBA's third interest rate cut on 1 October.

Information released over the past few days (before the jobs report) also provided early rate cut signals:

  • November 8: The RBA Statement on Monetary Policy.
The thing to note here is that the RBA's relatively optimistic projections come with a footnote - (a) the technical assumptions "include the cash rate moving in line with market pricing". Markets are currently pricing another rate cut by February 2020 or as early as December this year.

  • November 12: NAB Business Survey.
  • November 13: Westpac-Melbourne Institute index of consumer sentiment (along with retail sales - released on November 4).
  • November 13: Wage Price Index
  • November 14: Australian Labour Force Report
Weakening employment growth has already been flagged by successive readings on the ANZ job ads survey, with the lead indicating continued weakness in job creation.

This is supported by the trend estimates in jobs growth...

...and continued high underemployment rate which, would maintain pressure on wages growth.

Low wages growth equals less consumer spending equals less business revenues and profits equals less need for additional staff.

The pictures all call for more RBA rate cuts ... but by how much more?

Governor Lowe has already stated that, he doesn't intend to take the official cash rate to negative - for as experienced by other central banks, it creates new problems - so zero would be the lower bound (and then, QE?)

Then again, recent history shows that the more the RBA cuts interest rates the more pessimistic businesses and consumers become that risk turning these ominous expectations into a self-fulfilling prophecy.

Moreover, it risks blowing a bubble into the property and equity markets.

With no easy way out for the RBA, it's time that the government heeds calls for fiscal policy support and soon.

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