Australia Govt gridlock leaves central bank to do heavy lifting

By: | Updated: July 4, 2016 10:04 AM

Australia's central bank will have to carry the economy on its own after a cliff hanger election condemned the country to months of deadlock on budget reform, adding to an already compelling case for another cut in interest rates.

Bond markets are already well ahead of that with yields out to five years paying less than the overnight cash rate. (Reuters)Bond markets are already well ahead of that with yields out to five years paying less than the overnight cash rate. (Reuters)

Australia’s central bank will have to carry the economy on its own after a cliff hanger election condemned the country to months of deadlock on budget reform, adding to an already compelling case for another cut in interest rates.

Vote counting will not even be finished when the Reserve Bank of Australia (RBA) holds its July policy meeting on Tuesday, making an easing unlikely this month.

Rates are already at all-time lows of 1.75 percent after being cut in May.

Yet a move in August looks likely given inflation is too low for comfort, while consumers and businesses face the deadening hand of political uncertainty both at home and abroad.

It was little more than a week since Britain’s shock decision to leave the European Union roiled markets and darkened the outlook for growth globally.

“The outcome bodes poorly for confidence, growth, and reform and we believe will weaken further the nation’s AAA sovereign rating while keeping pressure on the RBA to do the heavy lifting,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

Ong sees rates reaching 1.25 percent before year-end, and she is hardly alone. A Reuters poll of 37 economists found all but 2 expected a steady outcome this week, but the majority predicted at least one more easing in August.

Futures imply a 60 percent chance of a cut next month, and are fully priced for a move by November.

Bond markets are already well ahead of that with yields out to five years paying less than the overnight cash rate.

Borrowing costs for the government are at record lows as investors hunt for any return in a world where negative bond yields are becoming the new normal.

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