RBA still set to cut to 0.5% by years end: Shane Oliver

EXPERT OBSERVER

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

The Bank’s post meeting statement was little changed which was a bit surprising given the further escalation of the US-China trade war over the last month and the run of soft economic data in Australia. Nevertheless the statement remained dovish:

• referring to the downside risks to global growth from the trade war and associated uncertainty;
• although it still sees growth strengthening to around trend, this is only expected to occur “gradually”;
• noting that the outlook for consumer spending remains the main domestic uncertainty;
• noting that wages growth remains subdued with little upwards pressure; and
• indicating that inflation will likely be subdued for some time yet.

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.

The RBA is still 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.  However, while these will help avoid recession we doubt that they will be enough to generate decent growth and the evidence from July is not that encouraging!

While house prices in Sydney and Melbourne may be bouncing higher, growth looks to have been far weaker than the RBA expected in the June quarter with only trade and public spending keeping the economy from going backwards, the growth outlook remains weak with the housing construction downturn gathering pace and threat from Trump’s trade war increasing, and there is no sign of any pick up in wages growth and inflation with unemployment looking more likely to drift up than down.

So while the RBA is content to wait for now, we continue to see two more rate cuts this year taking the cash rate down to 0.5%, with the next cut likely coming next month.

While the rebound in the Sydney and Melbourne property markets could present a problem for the RBA in terms of cutting rates further, the RBA will likely do what it believes is right for the “average” of Australia rather two cities’ property markets. But it may have to resort to tighter regulatory controls again if it needs to cool the Sydney and Melbourne property markets once more for financial stability reasons.

SHANE OLIVER is the Head of Investment Strategy and Chief Economist for AMP Capital