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RBA likely to cut OCR in November, over two rate cuts necessary to achieve jobless rate below 5 pct: St. George Economics

The Reserve Bank of Australia (RBA) is expected to cut the Official Cash Rate in November, taking the number of times the RBA cuts this year to three and the cash rate to 0.75 percent, according to the latest research report from St. George Economics.

In a speech earlier this week, RBA Governor Philip Lowe highlighted that we can have a lower unemployment rate that is consistent with the inflation target and, indeed, should have an unemployment rate that is lower. Lowe added monetary policy would help achieve these outcomes.

Further, Lowe does not expect jobs data to continue to surprise on the upside and thinks it is possible to have an unemployment rate below 5 percent without raising inflation concerns.

The RBA’s current forecasts have the unemployment rate averaging 5 percent this year and next year. These forecasts were based on the assumption that the cash rate would follow market pricing, which had two rate cuts almost fully priced in by year’s end.

Therefore, more than two rate cuts are necessary for the RBA to achieve an unemployment rate below 5 percent this year and next year, the report added.

The Governor also expects inflation to take a long time to return to the RBA’s target band and described the band as the RBA’s “north star”.

Lowe’s description that inflation will take a “long time” to get back to the band sniffed of a central bank losing its patience with inflation disappointing under the band for so long. His remarks suggest the RBA is preparing to help inflation get back to the band sooner.

"Given we are forecasting three rate cuts from the RBA this year, we are also revising down our Australian dollar forecast. We are now expecting the AUD/USD exchange rate to end this year at 0.66, from 0.68 previously. Global-growth concerns are also persisting and likely to hurt the Australian dollar, although commodity prices continue to provide some underlying support," St. George Economics further commented in the report.

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