Reserve Bank governor Philip Lowe’s first public speech of the year revealed that the chances of a rate cut was “evenly balanced” with a rate hike.
BetaShares chief economist David Bassanese said Australia faces a “delicate balancing act” in navigating itself out of the housing and credit adjustment.
“Just as China is trying to balance the needs of sustaining good growth while weaning itself of debt and capital spending-led growth, Australia faces a similar delicate balancing act in weaning itself of a debt-fuelled housing boom,” said Mr Bassanese.
“Given Governor Lowe’s ‘dovish tilt’ yesterday, however, the risk is that the RBA errs too far in supporting short-run growth and inflation objectives at the risk of undermining longer-run financial stability.
“Indeed, it now seems the RBA is poised to cut rates if we get a sustained increase in the unemployment rate. That raises the question: how far does the unemployment rate need to rise before the RBA should or would cut rates?”
Mr Bassannese believes the RBA will cut rates by end of the year, with a likely move to a 1 per cent cash rate by February 2020.
“My view is that we need to see a decent lift in the unemployment rate to at least 5.75 per cent to justify the longer-run risk to financial stability from reducing interest rates even further below their long-run neutral rate,” he said.
“It’s a delicate balancing, but some slowing in growth might be required if it’s the price to pay to facilitate Australia’s necessary post-Hayne financial adjustment.
“My base case view is that the RBA should not – but probably will – cut rates if the unemployment rate rises above 5.3 per cent in coming months. I now also believe that the unemployment rate will breach 5.4 per cent by year-end given, especially, the depth of the recent downturn in home building approvals.”