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Deutsche Bank see the RBA cutting rates to 3pct by end of the year, weakening global economy will encourage action

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Category: The Australian Economy

Published on Wednesday, 20 June 2012 10:35

Written by Sam Coventry

The Reserve Bank of Australia (RBA) has indicated that it remains relatively sanguine about the outlook for the domestic economy.

But, there is a cause for concern in the form of the global environment and the associated risks to the domestic economy stemming from that. And it this concern that could see the RBA cutting the basic cash rate in coming months.

In the near-term, the latest set of RBA minutes imply that the prospect of a further easing in July is remote.



Deutsche Bank analyst David Plank does however argue that we should still expect a cut to the interest rate.

In a note to clients, released today, Plank says:

"Indeed, we suspect the Bank has, in the absence of a material global shock, reset the clock. That means the next rate cut in Australia will ultimately come as an accumulation of evidence that suggests the magnitude of the easing delivered to date is insufficient against the backdrop of a weakening global economy, some downward pressure on the terms of trade, a still elevated currency and weakness in confidence locally.

"Our own view remains that this will ultimately prove to be the case; hence we continue to target a 3.00% cash rate by the end of the year - which is considerable less than is priced by the market."

The 3 pct cut is considerably less than the view priced in by the market, and Deutsche Bank do acknowledge that this could be risky.

"But with the downside risks to the global economy not ended by the Greek election, we are reluctant to aggressively trade this view. For now we are content to be paid the July OIS given that the market is still pricing around a 50% chance of a July rate cut," says Plank.