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Cash rate predictions in, economist fears RBA ‘forced to cut’ long term

Reserve Bank of Australia

The Reserve Bank of Australia will reveal the official cash rate next Tuesday, and some economists are concerned that the central bank will be backed into a corner long term.

The RBA is broadly expected to keep the official cash rate on hold at 1.5 per cent when it meets next Tuesday. This will be the 26th consecutive meeting that the RBA has left the rate at a record low.

Managing director of Market Economics, Stephen Koukoulas, believes that holding rates is a symbol that the RBA is underplaying the importance of missing its inflation targets over the last few years.

“It is judging the economy to be doing well, which is overstating the health of the economy, especially with ongoing wages weakness, falls in house prices, housing construction and consumer spending. The fact it thinks the next move in rates is likely to be up highlights this oversight and the effective abandonment of the inflation target,” he said.

Mr Koukoulas predicts it will be some time before rates move, suggesting it would require a dramatic event to promote the RBA to announce changes.

“Rates will be on hold for a while longer. I happen to think the RBA will be forced to cut, but not till 2019. The RBA needs to see something dramatic happen before it moves to cut. Perhaps household spending falling on the back of the decline in wealth? Perhaps ongoing weak inflation and wages? Perhaps the unemployment rate to touch 5.5 per cent?” he said.

“That being said, the futures market has just one, 25bp rate hike priced in by the end of 2020! So, if the market is right and I’m not, it is not a scenario that would concern too many people. Either way, rates will remain low for a very long time.”

The October board meeting

At its last board meeting, the RBA signalled that investors could find an even tougher market for credit in the months following the royal commission. 

In minutes from its October board meeting, the central bank said it is “possible” that further tightening is introduced off the back of the release of the commission’s interim report.

The RBA acknowledged that lending standards had become “tighter than they had been a few years previously”, which it said “reflected the introduction of supervisory measures to help contain the build-up of risk in household balance sheets”.

“The [interim] report contains many questions covering a broad range of issues, but at this stage provides relatively little indication of the recommendations that are likely to be made in the final report,” the central bank said.

“Members observed that while the regulators had already overseen a tightening of lending standards, and a degree of tightening of lending standards had been implemented by banks in anticipation of the commission’s findings, it was possible that banks could tighten lending conditions further given the issues raised in the report.”

The RBA added that it would be “important to monitor the future supply of credit to ensure that economic activity continued to be appropriately supported”.

Cash rate predictions in, economist fears RBA ‘forced to cut’ long term
Reserve Bank of Australia
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