RBA tipped to make deeper cuts to interest rates
While the Reserve Bank is likely to hold off on making further cuts to the official cash rate for a couple of months, the cash rate could drop to 0.5 of a percentage point by February next year, an economist predicts.
BetaShares chief economist David Bassanese said the RBA’s decision to cut the cash rate two months in a row is part of an aggressive growth strategy aimed at dragging down the unemployment rate and pushing up the rate of inflation.
“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.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.