RBA tipped to make deeper cuts to interest rates

“While seemingly a worthy goal, the RBA will likely find it very tough to meet either objective over the foreseeable future, suggesting even deeper interest rate cuts seem ahead of us,” Mr Bassanese said.

“My base case view is that the RBA, rightly or wrongly, will cut the cash rate to 0.5 [of a percentage point] by February 2020 — though it will now pause at least one or two months to assess the impact of its recent moves.”

Mr Bassanese said there has been deterioration in hiring intentions in the past year based on indexes by NAB, which suggests that rather than trending down, the unemployment rate is currently on course to trend up.

“Given wage growth has remained low at an unemployment rate around 5 per cent, it is unlikely to accelerate — and may well slow again — should the unemployment rate gradually move back towards 6 per cent,” he said.

“Ongoing trade tensions also risk causing both local and global businesses to delay investment spending plans, which will further undermine the growth outlook.”

The RBA’s efforts, he said, may therefore be in vain, especially with household debt and house prices still high in Sydney and Melbourne.

“Indeed, the most interest rate-sensitive parts of the economy — those that tend to benefit most from lower rates — already seemed tapped out,” he said.

Mr Bassanese said it’s possible that Australia may already be in a “liquidity trap” and further deep interest rate cuts would be akin to “pushing on a string”.

The RBA’s goal of boosting inflation more broadly will likely also remain frustrated by ongoing structural disinflationary forces, such a technology, demography and globalisation, he added.

Lower interest rates, he warned, could be creating financial distortions and medium-term risks to financial stability.

“In short, due to already tapped-out consumers and structural disinflationary forces, deeper interest rate cuts seem unlikely to push up inflation over the foreseeable future, and — to the extent they do — could come at the risk of medium-term financial stability concerns,” he said.

“Better balanced macroeconomic policy is required, specifically focused on unemployment rather than inflation. Spare labour market capacity, rather the inflation per se, should be the ultimate concern of policymakers — and the former seems better tackled not through lower interest rates but improved labour market policies and more immediate fiscal stimulus.”