Kathryn Lee - 9 Aug, 2019

Don’t expect wages to increase this year, but more rate cuts predicted

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The Reserve Bank has alluded to further cuts to the cash rate this year, with economists predicting a further two by February 2020.

eChoice RBA Commentary for July 2019

  • On July 2 the official cash rate dropped to 1.00%;
  • Further rate cuts to 0.5% predicted early next year;
  • The Australian dollar fell to 69.10 US cents; and
  • Unemployment stayed consistent at 5.2%.
  • The news of potential cuts comes off the back of a record low cash rate, set at 1% in early July. Some analysts are now predicting it could be slashed to 0.5% early next year.

    Westpac Chief Economist, Bill Evans, announced that, while he believes the cash rate will remain unchanged after the RBA’s next board meeting in August, he expects it will reduce rates by October and again in February next year.

    In an address last week, RBA Chief Phillip Lowe did not deny further cuts, but confirmed the low cash rate would certainly continue and did not rule out changes to monetary policy.

    “If demand growth is not sufficient, the Board is prepared to provide additional support by easing monetary policy further,” Lowe stated last week.

    “However, as I have discussed on other occasions, other arms of public policy could also play a role in this scenario.”  

    “Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates.”

    Following these statements, the Australian Dollar took a small dive – despite expectations for growth – falling more than 0.1% before ending the week at $.691 US Dollars.

    Why do we need more rate cuts?

    The consensus appears to be that without wage growth, continued rate cuts will be necessary to encourage consumer spending and lift inflation.

    In his latest analysis, ABC Business Editor Ian Verrender explained that the economy isn’t responding predictably to factors that would have historically indicated a period of prosperity (such as low unemployment). This is leading the RBA to turn to measures such as cutting the cash rate.

    For instance, while it is typically believed an unemployment rate of less than 5% is enough to help wages and inflation rise, this is not happening. Now, the RBA believes Australia needs a jobless rate of 4.5% for these changes to occur. With unemployment rising to 5.2% this year, other factors have got to give to help Australians get out of debt and start spending.

    “Unless we see a dramatic drop in unemployment within the next few months, the RBA will have no option but to further cut interest rates,” Verrender wrote in his analysis.

    The Australian Financial Review reports future rate cuts and policy reforms might depend on the findings of the latest Australian Bureau of Statistics labour force report, due to be published on August 15.

    The alternative to further rate cuts is that large corporations lift their wages. However, according to Verrender this doesn’t look likely. Despite both the RBA and big business knowing this needs to happen to “inflate away our debt problems” many businesses are hesitant to make the first move.

    “At some point, however, business leaders will have to recognise their workers are also their customers,” he noted.

    Further cuts to the cash rate in the coming months would continue a downward trend that has been occurring since 2011. There have been two cuts already this year, with the RBA slashing the figure by 0.25% in both June and July.

    Word by Rebecca Mitchell

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