Expect an RBA pause for a few months and then more cuts: Shane Oliver

EXPERT OBSERVER

The RBA has cut the cash rate by another 0.25% following its July board meeting taking it to a record low of just 1%. This followed a 0.25% cut last month.

Assuming banks cut their rates by 0.25% it will take deposit rates to their lowest since the mid-1950s and headline (standard variable) mortgage rates to their lowest since the early 1950s, although many mortgage rates are already at record lows. 

Source: RBA, AMP Capital 

In moving to cut rates again the RBA cited a reasonable outlook with Australian economic growth expected to be around trend but uncertainties around the US trade disputes and the outlook for consumer spending in Australia and a desire for lower unemployment and underemployment. 

Basically the RBA has realised that to get wages growth up and inflation back to target the economy needs lower unemployment and underemployment. Interestingly it is now referring to both unemployment and underemployment. It is likely also concerned about the slowdown in growth seen over the last year and an emerging rising trend in unemployment.

The final paragraph of the RBA’s post meeting statement noted that “The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.” This suggests that the RBA has left the door open to further easing but the use of the words “if needed” (which were not present in the same statement a month ago) suggests that a further deterioration in the economic outlook relative to its forecasts is needed to cut rates again.

Our assessment is that growth will come in well below the RBA’s expectation for 2.75% this year and next and so unemployment is likely to drift higher from here rather than fall as the RBA is hoping. As a result, while we expect the RBA to leave rates on hold for the next few months as it assesses the impact from the June and July rate cuts we continue to expect more rate cuts ahead with the next in November followed by another in February which will take the cash rate to 0.5%.

Help from more fiscal stimulus and structural reforms is needed but this will take time to come through and impact the economy so the pressure falls back on the RBA in the short term.

DR SHANE OLIVER is Head of Investment Strategy and Chief Economist at AMP Capital.