Australia - Foresee more rate cuts

In-line with market and our expectations, Reserve Bank of Australia (RBA) left its Official Cash Rate (OCR) unchanged at 1.00% in August monetary meeting. The pause in RBA’s monetary policy suggest policy makers are now assessing the transmission of 50bps cut into the real economy

The overall tone of the meeting was rather dovish-tilt as the central bank will lower its OCR without hesitation to support a sustainable growth if needed. At this juncture, with RBA’s major concerns focused on the ongoing trade dispute, we foresee the possibilities for a third rate cut likely to come in September by 25bps, to which the probability is around 50%, followed by the fourth cut if needed in December to which the current probability is 35%.

• In-line with market and our expectations, Reserve Bank of Australia (RBA) left its Official Cash Rate (OCR) unchanged at 1.00% in August monetary meeting after a back-to-back rate cut in June and July. The pause in RBA’s monetary policy suggest policy makers are now assessing the transmission of 50bps cut into the real economy i.e. consumer spending.

• The overall tone of the meeting was rather dovish-tilt as the central bank will lower its OCR without hesitation to support a sustainable growth if needed. Besides, RBA Gov. Lowe expressed his concerns on sluggish economic growth and rising spare capacity in the labour market, which in-turn is keeping wage growth subdued.

• Despite growth is still tilted to the downside, RBA expects GDP to grow at 2.50% in 2019 and 2.75% in 2020, supported by the “low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector”.

• On the inflation front, RBA expects consumer price index will take longer than expected to hit 2% target while highlighting “rates to remain low for an extended period of time.” Meanwhile, central bank highlighted the overall condition in the housing market remain soft, though they are seeing some stabilization in-particular in Sydney and Melbourne.

• At this juncture, with RBA’s major concerns focused on the ongoing trade dispute, we foresee the possibilities for a third rate cut likely to come in September by 25bps, to which the probability is around 50%, followed by the fourth cut if needed in December to which the current probability is 35%.

• Post monetary meeting, the AUD/USD was little change, appreciated by 0.49% to 0.6789 from a multi-year low of 0.6756. Looking ahead, we expect AUD/USD to be around 66-67 levels, from our previous levels of 72 partly due to ongoing trade tension between US-China with growing risk of heading from trade war to currency war.

The Philippines - Expect rate cut on Thursday

Headline inflation eased to 2.4% y/y in July from 2.7%y/y in June, the lowest reading in over two years following slower growth in the ‘food and beverages’, ‘housing and utilities’ and ‘transport’ components. Excluding volatile food and fuel prices, core inflation eased 3.2% y/y in July from 3.3% y/y in June.

We expect a high base effect and softer demand pressures will continue to weaken inflation in the coming months with room to even dip below 2.0% mark. The latest inflation data and trend supports our view for the Bangko Sentral ng Pilipinas (BSP) to cut its policy rate by 25bps to reach 4.25% at its meeting this Thursday. Room for the central bank to cut rates up to 50 bps for the balance of 2019 is on our cards.

• As expected, headline inflation eased to 2.4% y/y in July from 2.7%y/y in June, the lowest reading in over two years. Excluding volatile food and fuel prices, core inflation eased 3.2% y/y in July from 3.3% y/y in June. Looking at the first seven months, headline inflation averaged at 3.2% y/y compared to 4.5% y/y in the same period last year while the core-inflation averaged at 3.6% y/y, same pace as compared to the period review.

• The slower inflation print was primarily driven by a marked deceleration in food & beverage prices, up 1.9% y/y in July from 2.7% y/y in June – marking a low since September 2016. Besides, the drag in inflation was attributed by weaker cost of housing & utilities (2.2% y/y from 3.0% y/y) coupled with cost of transportation (0.7% y/y from 1.6% y/y).

• Looking into the remaining months of 2019, we expect a high base effect and softer demand pressures will continue to weaken inflation pressure with room to even dip below 2.00% mark. However, upside risks to inflation pressure remains due to uncertainty in bad weather condition, the African swine fever spread and risk of geopolitical tension triggering a supply shock to the global crude oil market.

• After having instituted a 25bps cut by Bangko Sentral ng Pilipinas (BSP) in May, the latest inflation data and trend supports our view for an additional 25bps rate cut on their policy rate at monetary meeting this Thursday. This should bring the policy rate to 4.25%. Room for the central bank to cut rates up to 50 bps for the balance of 2019 is on our cards, much depending on the severity of trade war escalate.

• On the currency side, we foresee peso to weaken to around 53-54 levels against the USD as we move ahead in 2019.

Source: AmInvest Research - 7 Aug 2019