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POLL-Australia c.bank seen cutting rates in June, August as policy 'puzzle' solved

Credit: REUTERS/© Jason Reed / Reuters

Economists overwhelmingly expect Australia's first interest rate cut in almost three years on June 4, with a follow-up move likely in August, a Reuters poll shows, as the central bank looks to revive growth and inflation.

By Swati Pandey

SYDNEY, May 22 (Reuters) - Economists overwhelmingly expect Australia's first interest rate cut in almost three years on June 4, with a follow-up move likely in August, a Reuters poll shows, as the central bank looks to revive growth and inflation.

All but three of 35 economists surveyed this week, including those from the country's biggest banks, expect the Reserve Bank of Australia (RBA) to cut the cash rate to a record low 1.25% next month.

And 80% of those polled, or 28, see another cut to 1.00% in August.

That is a striking shift from the previous poll in late April when most economists predicted the first cut in August. Some were also primed for an easing in May.

"Timing (the rate cut) has clearly been a challenge," said Nomura economist Andrew Ticehurst.

"We thought the case for a lower cash rate was made in May and, when the RBA showed more reluctance than we expected earlier this month, we pushed the timing of this first cut back to August," he added.

"However, it now appears to us that the RBA will 'split the difference', with a first move most likely in June."

A cut would be the first for RBA Governor Philip Lowe, who has held policy at an all-time low 1.50 percent since taking the central bank's helm in September 2016.

Lowe is hardly alone in changing tack from a long-held tightening bias to an explicit dovish stance.

As global growth showed signs of sputtering this year led by the U.S.-China trade battle, the U.S. Federal Reserve halted its monetary tightenings. New Zealand, India and Malaysia have cut rates this year to support their economies.

PUZZLE SOLVED?

"It was in our opinion only a question of 'when' and not 'if' the RBA would loosen policy," said Citi economist Josh Williamson, who predicts cuts in June and August.

Australia's shift came as recent dour data painted a sullen picture of the $1.3 trillion economy with growth slowing, property prices tumbling, household spending weakening, wages stagnant and inflation lukewarm.

Lowe ditched his long-held tightening bias in February and shifted to neutral gear, though he was still reluctant to ease as the labour market was generating jobs aplenty.

Employment is rising at a rapid annual pace of 2.6%, even as gross domestic product growth was slowing to under 2%.

The RBA in general, and Lowe in particular, often referred to this "puzzle" in explaining their patient stance on rates, emphasising policy would ease if unemployment ticked higher.

"I think to a large extent this puzzle is now solved," said JPMorgan Chase & Co economist Ben Jarman, who had expected a cut this month. "We are now seeing business surveys and job ads turning down, which does mean that the labour market will no longer be as strong."

Indeed, data last week showed the jobless rate climbed to an eight-month high of 5.2% in April.

While the monthly series is volatile, this was the second straight month of rising unemployment and followed other data showing annual wage growth had stagnated at 2.3% for three quarters.

That led Lowe to give a clear signal in a Tuesday speech that the cash rate might be lowered on June 4.

Goldman Sachs economist Andrew Boak said that while some labour market softness is likely to prove temporary, "pre-emptive rate cuts are appropriate to head off risks of a more sustained cooling and keep Australia's broader macro recovery on track".

Until recently, Boak had expected rates to remain at 1.5% until mid-2020.

(Reporting by Swati Pandey; Editing by Richard Borsuk)

((swati.pandey@thomsonreuters.com; +61 2 9321 8166; Reuters Messaging: swati.pandey.thomsonreuters.com@reuters.net; twitter.com/swatisays))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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