News - 29 May, 2019

Economists agree several cuts to the RBA interest rate could be looming

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The Reserve Bank of Australia (RBA) appears prepared to drop official interest rates next month, potentially making it the first variation since August 2016.

In a speech to the Economic Society of Australia in Brisbane, governor Phillip Lowe said a rate cut would be addressed in their meeting next week.

He believes the bank’s expectation for a lower unemployment rate and steady rise in inflation won’t be met without a cut.

“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” Dr Lowe said.

“Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.”

The March quarter revealed extremely low inflation figures and an increase in unemployment. In this period, the unemployment rate climbed to 5.2% and Dr Lowe believes there aren’t many options available to the RBA.

An interest rate cut has not occurred since August 2016 when it was cut to 1.5% and has remained at this rate for two and a half years.

While there has been a rise in wage growth, this has not matched by a rate that would be consistent with the RBA’s inflation target range.

Before Dr Lowe’s public statement, markets had steadily anticipated the possibility of a cut in the interest rate.

According to a survey by Bloomberg, economists unanimously agree that an impending cut is pretty much certain. Some predict it could be reduced to as low as 1% – or even lower.

Unemployment has been the key consideration observed by the RBA, due to the influence it has on inflation targets and the property market through the availability of home loans.

Westpac’s Bill Evans predicts that there will be three cuts to the official interest rate this year.

He agrees a weakening economy is behind the likely cuts in interest rates. Evans told The Guardian he believes at the next meeting on June 4, the RBA will announce a rate cut of 0.25%, with a similar cut in August and then again in November.

He even went as far as to suggest a program of quantitative easing or asset purchases, which helped the US, UK, Europe and Japan recover after the global financial crisis.

“Our forecasts for employment; wages growth; economic growth; inflation and conditions in the housing market are consistent with the need for policy to ease through the full course of 2019,” Evans told The Guardian.

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“We see the unemployment rate drifting up to 5.4% by year’s end; economic growth at 2.2% for 2019; underlying inflation at 1.4%; and the housing market still weak although approaching stability.”

Evans believes for a rate of 0.75% to be maintained, the housing market would also need to stabilise and be supported by the federal government.  He told The Guardian there is an opportunity for the federal government to make lasting reform.

“Our central forecast for the terminal cash rate in this cycle is 0.75% with risks to the downside,” Evans told the Guardian.

“We would certainly see 0.5% as the floor for the cash rate, with QE [quantitative easing] a more effective policy tool thereafter.”

Evans said the terms of trade would need to perform better than their current budget estimates, and the current tension within the global trade would need to ease.

Words by Michelle Elias

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