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Although Australia’s (AU) October month Leading Index (MoM) came in well above -0.12% revised prior to -0.07%, Westpac holds its dovish bias concerning the Reserve Bank of Australia’s (RBA) February month rate decision.

Key quotes

Despite a slight improvement in the month, the Leading Index growth rate remains materially below trend and continues to point to weak economic momentum carrying well into 2020.

This below trend “theme” for the Australian economy is consistent with Westpac’s current forecast for GDP growth in 2020 of 2.4%, compared to a trend growth rate of 2.75%.

The Reserve Bank has recently released its revised growth forecasts for 2019, 2020 and 2021. It has maintained its view that year on year growth in 2020 will return to trend, at 2.8%, for the first calendar year since 2016.

The Leading Index growth rate has deteriorated over the last six months from -0.53% in May to -0.91% in October. The main components driving the 0.39ppt shift have been a sell-off in commodity prices (-0.43ppts); a more mixed performance on the Australian sharemarket (-0.20ppts); a deterioration in consumers’ unemployment expectations (-0.17ppts), in consumer expectations more generally (-0.10ppts); and a slowdown in monthly hours worked (-0.07ppts).

We expect that by next February the Board will have received enough information on the impact of the three cuts we have seen since June to acknowledge the need to reduce the cash rate by a further 0.25%, maintain a clear easing bias and consider introducing unconventional policies.