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QE by the RBA likely to result in lower bond yields in Australia, says Capital Economics

The decline in bond yields in Australia and New Zealand throughout 2019 has paused in recent months following optimism about a potential trade deal between the US and China and hawkish language from the Fed, according to the latest research report from Capital Economics.

But bond yields in both countries are expected to resume their decline in 2020. Rising unemployment, sluggish growth and easing inflation are further seen to force the RBA to cut rates to 0.25 percent by the middle of next year.

What’s more, the RBA is expected to cross the Rubicon and launch quantitative easing in 2020 adding to downward pressure on bond yields. In New Zealand, we expect weak GDP growth and a deteriorating labour market to prompt the RBNZ to cut rates twice next year, more than investors currently anticipate, the report added.

The upshot is that yields are likely to decline further in Australia and New Zealand despite our expectation of a rise in US yields in 2020. Activity & output indicators suggest GDP growth will remain sluggish in Australia and slow further in New Zealand.

Consumer spending indicators point to ongoing weakness in consumption growth in both countries. Business indicators point to soft business conditions weighing on investment in the coming quarters. External trade indicators suggest net exports made no contribution to growth in Australia and became a drag on growth in New Zealand in Q3.

Labour market indicators point to rising unemployment rates in both countries. Inflation indicators suggest wage growth will weigh on non-tradable inflation in both countries in the coming quarters. Property indicators show that house price growth has picked up in Australia and New Zealand, but may moderate in 2020 in both countries.

"Financial markets indicators show we expect more monetary easing in both countries than financial markets, which will weigh on both currencies in 2020," Capital Economics further commented in the report.

By Debarati Bir
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