RBA on hold but expect cash rate of 0.5% by February 2020

RBA on hold but expect cash rate of 0.5% by February 2020
RBA on hold but expect cash rate of 0.5% by February 2020

EXPERT OBSERVER

The RBA remained on hold at a record low cash rate of 1% at its August board meeting as widely expected. This followed 0.25% rate cuts in June and July.

The Bank’s post meeting statement was dovish:

  • referring to the downside risks to global growth from the trade war;
  • revising down yet again its GDP growth forecast to around 2.5% for this year (from 2.75%);
  • noting that wages growth remains subdued with little upwards pressure; and
  • indicating that inflation will take longer than earlier expected to reach 2%.

The final paragraph repeated Governor Lowe’s recently used forward guidance to expect an “extended period of low interest rates” and noted that the Board stands ready to ease monetary policy again if needed, indicating that the Bank retains an easing bias.

For now the RBA is in wait and see mode – basically waiting to see what sort of boost to growth the rate cuts of June and July and the Federal Government’s tax cuts for low and middle income earners provide.  Baring a shock to the economy this is likely to remain the case for a few months.

However, while the rate cuts seen so far and the Federal Government’s tax cuts will help, we see unemployment drifting up to around 5.5% by year end in contrast to the RBA’s expectation for a fall to around 5% over the next couple of years. The stimulus to date won’t be enough to get wages growth up and inflation back to target and so we expect the RBA to resume cutting rate later this year with 0.25% cuts in each of November and February.

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 remains on the RBA in the short term. And the escalating US/China trade war adds to this pressure to the extent that it threatens demand for Australian exports and business confidence locally.

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

Tags: 
Rba Rate Decision Unemployment

Comments

Be the first one to comment on this article
What would you like to say about this project?