On Tuesday, the Reserve Bank decided to cut the official cash rate to 1 per cent. This follows its earlier decision in June to lower the cash rate from 1.5 per cent to 1.25 per cent.
AMP Capital chief economist Shane Oliver said the RBA has realised that in order to bring wages growth and inflation back to target, the economy needs lower unemployment and underemployment.
“It is likely also concerned about the slowdown in growth seen over the last year and an emerging rising trend in unemployment,” said Mr Oliver.
In its post meeting statement, the RBA said it would continue to “monitor developments in the labor market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
“This suggests that the RBA has left the door open to further easing but the use of the words ‘if needed’, which were not present in the same statement a month ago, suggest that a further deterioration in the economic outlook relative to its forecasts is needed to cut rates again,” he explained.
Assuming banks cut their rates by 0.25 per cent, Mr Oliver said this will take deposit rates to “their lowest since the mid-1950s and headline (standard variable) mortgage rates to their lowest since the early 1950s, although many mortgage rates are already at record lows”.
Mr Oliver predicts that growth will come in well below the RBA’s expectation for 2.75% this year and next and so unemployment is likely to drift higher from here rather than fall as the RBA is hoping.
“As a result, while we expect the RBA to leave rates on hold for the next few months as it assesses the impact from the June and July rate cuts we continue to expect more rate cuts ahead with the next in November followed by another in February which will take the cash rate to 0.5 per cent,” he said.
“Help from more fiscal stimulus and structural reforms is needed but this will take time to come through and impact the economy so the pressure falls back on the RBA in the short term.”
