Halister News

(Bloomberg) -- RBA will cut trough rate to 1% in this cycle to avoid disinflation and assist with transition in the economy and equity mkt, as household leverage boom ends and commodity super-cycle unwinds, Morgan Stanley analysts led by Daniel K Blake and Chris Nicol, write in May 24 note.

• RBA’s own forecasting raises questions about inflation target just as short-term inflation expectations are falling in concert with market pricing of long-term inflation
• See risks to growth, rather than inflation, providing the driving factor for the final 50bps of easing
• RBA may pause at 1.50% after another 50bps adjustment, but holding pattern will last just six months with next 50bps of cuts in 1H17 as macro drag of a slower housing market becomes more apparent
• Forecasts unemployment rising back toward 6.5% over 2016-17 as the housing slowdown plays out through activity and weaker consumption; this will likely force policy response from RBA
• MS lowers year-end underlying inflation forecasts to 1.4% from 1.8%; sees 4Q17 at 2.0% from 2.3%
  • Revision takes into account:
  • Dis-inflationary forces, including from regional excess capacity on tradeables
  • Sustained weakness of unit labor costs on non-tradeables
  • An emerging oversupply of dwellings on rent, and competitive dynamics on food/staples prices