Bank says core inflation has fallen, global growth has deteriorated and there is a chance the US could cut rates

This article is more than 1 year old

This article is more than 1 year old

JP Morgan has predicted the Reserve Bank of Australia will drop interest rates by one point through a series of four rate cuts over the next year.

Wednesday’s forecast by chief economist Sally Auld, along with colleagues Ben Jarman and Tom Kennedy, is the boldest yet for rate cuts.

Most banks are predicting rates will be cut 50 basis points by mid-2020, with Westpac economist Bill Evans on Friday predicting they could would reach 0.75% by the end of the year.

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But Auld, Jarman and Kennedy went even further, saying that core inflation had fallen, global growth has deteriorated and there was a chance the US could cut rates.

“Envisage a scenario in which the fed is cutting in response to weaker growth; in such circumstances the RBA is unlikely to stop at 50 basis points of easing,” they wrote on Wednesday.

“Our sense is that the combination of global headwinds, and the RBA having slipped behind the curve, could therefore be decisive in bringing four cuts, rather than three.

“The structural headwinds facing the domestic economy – a deleveraging of household balance sheets, persistently low incomes growth, a recalibration of lending standards and a rebalancing of economic growth away from housing-related activity – all demand a long period of low rates.”

The RBA has kept interest rates on hold at 1.5% for a record 30 consecutive meetings but is expected to cut soon after confirming its downgraded near-term economic growth forecasts and trimming its mean inflation targets.

It will announce its next decision on rates on Tuesday.