Rate trajectory rides on Trump trade deal

Speaking at an event hosted by Sydney-based mortgage brokerage Atelier Wealth, CommSec senior economist Ryan Felsman noted the impact of trade tensions between the United States and China on the Reserve Bank of Australia’s (RBA) monetary policy strategy.

According to Mr Felsman, political pressures associated with the upcoming presidential election in the United States would trigger a trade deal between US President Donald Trump and Chinese President Xi Jinping, which he said would improve global economic growth expectations.  

“In terms of the trade situation at the moment, President Donald Trump has to win the next election in 12 months, President Xi Jinping doesn’t,” he said.

“We expect President Trump to come up with a mini deal, which perhaps will improve global growth going into next year.”

Mr Felsman said the promise of stronger global economic conditions off the back of a potential trade deal would reduce the likelihood of aggressive easing from the RBA.

“We’re hoping the Reserve Bank only has to go down to 0.5 per cent. The worst-case scenario is that they’ll go to 0.25 per cent,” he said.

The economist added that he does not expect the cash rate to enter negative territory, claiming that of the “unconventional” tools available to the RBA, quantitative easing is more likely to be utilised if needed.  

“The [RBA] has kind of ruled out negative interest rates; governor Philip Lowe came out last week and said [the RBA] doesn’t want to do it,” he said.

“What they’d look to do is buy government bonds or corporate bonds if they’re available.”

Mr Felsman also noted the challenges associated with the federal government’s commitment to budgetary surplus, which he said places further pressure on the RBA. 

“The issue is that we’ve got a federal government at the moment that is intent to have a budget surplus; they want to present that to the people at the next budget in May,” he said.

“What [the RBA] would rather see is fiscal spending.”

[Related: APRA to vigilantly monitor investor rebound]