The Reserve Bank of Australia (RBA) decided to leave interest rates on hold this month, after two cuts in June and July.
This was pretty much in line with expectations, as inflation figures released recently were on the soft side, but not soft enough to tip the RBA into a third successive rate cut.
Inflation for the June quarter came in at 1.6 per cent, which was up from a two and a half year low of 1.3 per cent in the March quarter, but still well below the RBA’s target inflation rate of between two and three per cent.
Our view is that after the two winter rate cuts and the tax cuts that have recently passed through parliament the RBA is taking a wait and see approach and will judge what the impact of those measures has been before moving again.
More cuts to come
However, ultimately we do think the RBA will cut interest rates again, but probably not until November.
The reason we are forecasting more cuts is quite simple; there are still risks around both the global and local economy.
Globally, the ongoing US-China trade war has the potential to hurt Australian exports, while locally we’ve also got ongoing weakness in the Australian economy as growth is below where it should be.
There has also been some upwards drift in unemployment in Australia and both inflation and wages growth remain very low.
Ultimately, we believe those things will tip the RBA over the line into cutting rates again.
How low will they go?
We believe a 0.25 per cent cut will come around November, taking rates to 0.75 per cent, and we’re forecasting another 0.25 cut to follow in around February next year, which will take the cash rate to 0.5 per cent.
However, we see that as being the low point as once that point is reached I think the RBA will conclude that there’s not much point in cutting any further as it’s going to get harder and harder for the banks to pass those cuts on as cuts in mortgage rates.
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