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More rate cuts likely as economy remains sluggish

Stephen Miller and Cameron Kusher
By Sarah Kendell
02 October 2019 — 1 minute read

Economists and fund managers have predicted more interest rate cuts following the Reserve Bank’s widely expected decision this week to reduce the cash rate to 0.75 of a percentage point, as key growth indicators for the Australian economy continue to languish.

Grant Samuel Funds Management adviser Stephen Miller said while the RBA had referenced a “gentle turning point” in the economy in its statement following Tuesday’s interest rate decision, the lack of positive data to indicate a pick-up in economic activity meant there were likely further cuts to come.

“It seems that the RBA has a strong bias to ease further, given limited wage and price inflation, and that slowing employment growth probably means there is not much prospect of the ‘gentle turning point’ leading to any near-term meaningful uptick in measures of wage and price inflation,” Mr Miller said.

“Further monetary easing looks likely, perhaps encompassing QE, as major central banks continue to resort to monetary easing… [which] would force the RBA to follow suit.”

However, CoreLogic head of research Cameron Kusher questioned the Reserve Bank’s sudden urgency around cutting rates, cautioning it could be a “too little, too late” for an economy that already appeared to be flatlining.

“Cutting [interest rates] three times in five months signals a pretty weak economy. However, the economy has been pretty weak consistently over the past four to five years, so why all of a sudden is stimulus for the economy so urgent?” Mr Kusher said in a Twitter post on Tuesday.

“I understand having to reverse an interest rate cut because it was a step too far is a bad look, but isn’t a now more rapidly weakening economy and consistent misses on forecast pick-ups in GDP growth, inflation and job creation worse?

“You just have to hope that these lower rates don’t just inflate asset prices... and that the lower exchange rate and reduced incentive to save can stimulate more economic activity.”

Meanwhile, Fidelity global cross-asset investment specialist Anthony Doyle said there was method in the RBA’s madness, and an additional rate cut would likely cut through to consumer spending quickly, given Australian households’ high reliance on variable mortgage rates.

“In cutting rates so aggressively this year, the RBA is hoping to generate a stronger labour market, higher wage growth and to stimulate domestic consumption,” Mr Doyle said.

“Fortunately for the RBA, the transmission mechanism of monetary policy is fairly quick in the Australian economy, as around 80 per cent of housing loans and the majority of business loans have variable interest rates.

“Households and businesses should receive an economic windfall almost immediately, whilst a weaker Australian dollar should support export-oriented and import-competing sectors.”


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