RBA waits and sees as interest rates remain on hold
Head of Investment Strategy and Economics and Chief Economist, AMP Sydney, Australia
The Reserve Bank of Australia (RBA) has left interest rates on hold for the second month in a row, following its previous cuts in June and July.
This wasn’t a great surprise as most economists had tipped the RBA to leave rates on hold. Given the recent rate cuts and the Government tax cuts which began on July 1, a ‘wait and see’ approach by the RBA was widely expected.
More cuts ahead
However, we do still see the RBA cutting interest rates further this year.
We’re forecasting another 0.25 per cent cut to be announced in October, after the RBA’s next board meeting taking rates down to 0.75 per cent, ultimately followed shortly thereafter by another 0.25 per cent cut, which would take the official cash rate down to 0.5 per cent.
Why will the cuts continue?
The RBA is under a lot of pressure to cut rates further. This is despite the economic positives we’ve seen lately – the tax cut, the rate cuts that have already occurred and the Australian dollar’s recent fall which will help the economy.
The problem is that none of those things – or the combination of them – is likely to help the economy enough to tackle some of the big headwinds the local economy is facing. They’re unlikely to help drive unemployment down, or wages growth up or inflation up.
Consequently the RBA will remain under pressure to cut interest rates further and that is why we see more cuts ahead over the remainder of this year.
What’s next?
However, once the official cash rate reaches 05 per cent, further cuts are unlikely as it’s going to get harder and harder for the banks to pass those cuts on as cuts in mortgage rates.
At that point in time, if further stimulus to the economy is required the RBA could turn to quantitative easing or some other, more unconventional forms of monetary policy.
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Dr Shane Oliver, Head of Investment Strategy & Chief Economist-
Important notes
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