The RBA will cut the cash rate to 1% by year end: Shane Oliver

The RBA will cut the cash rate to 1% by year end: Shane Oliver
The RBA will cut the cash rate to 1% by year end: Shane Oliver


This month’s RBA Board meeting saw interest rates left on hold for a record 27th meeting in a row.

No surprises there.

Since its December meeting the RBA has become less upbeat - acknowledging that downside risks have increased globally, revising down its Australian growth forecasts from “around 3.5%” to “around 3% for this year and a little less in 2020”, acknowledging the threat to consumer spending from falling house prices, revising down its inflation forecasts yet again to 2% this year (from 2.25%) and sounding a bit more concerned about the downturn in house prices.

However, despite its growth and inflation downgrades and increased downside risks it retains the view that “further progress in reducing unemployment and having inflation return to target is expected” implying that it still believes that the next move in rates will be up rather than down. 

This probably explains why the $A bounced from around $US0.72 around the time of the rates announcement to around $US0.726 an hour or so later.

Tomorrow’s address by Governor Lowe and Friday’s Statement on Monetary Policy may provide greater clarity as to whether it retains its “next move is more likely to be up” bias on interest rates.

Nevertheless, our view is that RBA is underestimating the impact of the housing downturn on the economy – both directly via reduced housing construction and also indirectly via reduced consumer spending – and as a consequence we see weaker growth and lower inflation than the RBA is forecasting.

Consistent with this we have seen a string of soft economic data releases this year including for business conditions, business conditions PMIs, consumer confidence, retail sales, housing approvals and housing starts, house prices and job ads.

As a result our view remains that the RBA will cut the cash rate to 1% by year end.

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

Shane Oliver Rba

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