It became clearer to the market in the last couple of weeks that the Reserve Bank was in no hurry to lower the cash rate this month, and at today’s board meeting, that proved correct. The official cash rate remains on hold at 0.75 per cent, which is still a historic low.
We are of the view that the Reserve Bank should have cut rates, because the economy remains soft (as highlighted by weak September retail sales data) and we are a long way off from full employment and wages growth being strong.
The central bank has, however, likely decided to sit back and give previous measures – like the government’s income tax cuts and the last three rate cuts – a chance to filter through the economy.
Further, there have been some positive movements in domestic and international markets recently. At home, economic growth for the second half of this year has been a little bit stronger than the same period last year – albeit sluggish – and inflation isn’t getting worse. Further, the housing market is picking up, signalling that previous cuts from this year are taking effect.
Looking through a global lens, some risks in international markets are receding slightly. For example, trade tensions between the US and China haven’t escalated recently, as they have in months gone past.
The Reserve Bank has one remaining board meeting this year, before it regroups for its first meeting of 2020 in February. In the absence of significant fiscal stimulus, we are of the view that the RBA will hand down cuts at both of those meetings, bringing the cash rate to a new record low of 0.25 per cent. Drops beyond that point would likely not produce a stimulatory impact, as the track record so far tells us the banks won’t match the RBA’s cuts.
Below-target growth figures mean the RBA may consider further monetary measures to stimulate the economy. AMP Capital has prepared a wrap of the options that are on the table for the central bank next year, which you can read more about here.
Subscribe to Oliver's Insights to receive my latest articlesShane Oliver, Head of Investment Strategy & Economic and Chief Economist
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