May 20, 2019

Australia likely to join the central banks cutting rates in 2019

Interest rates are very likely to come down in Australia after the country re-elected its conservative government in a snap election Saturday.

What's happening: Given last week's soft unemployment and inflation reports, "the Reserve Bank of Australia will have no choice but to cut interest rates next month and follow with additional easing in the fall," says BK Asset Management's Managing Director of FX Strategy Kathy Lien in an email to clients.

  • "The market is only pricing in a 69% chance of a June rate cut but we think the odds are closing to 90-95%."

That will likely mean good news for Australia's stock market if it follows the pattern set by New Zealand's rate cut last month. New Zealand's stock market has been one of the only global benchmarks to remain in the green since Trump reinvigorated the U.S.-China trade war earlier this month.

  • Quizzically, and to the chagrin of policymakers, the kiwi has strengthened against the U.S. dollar since the May 8 rate cut. The Australian dollar followed suit Sunday night.

The big picture: Australia would become the 3rd major central bank, following New Zealand and India, to cut rates this year. This was supposed to be the year of global quantitative tightening, but things are drifting in the opposite direction. Expect more central banks to cut rates as the year continues.

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