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Predictions roll in for how low rates can go

Shane Oliver

The Reserve Bank of Australia’s decision to cut rates to a new record low may not be enough to stimulate the economy, the central bank governor warned, prompting predictions of further rate cuts.

The official cash rate of Australia has moved to 1.25 per cent, down 25 basis points from its already historic low of 1.5 per cent, which the Reserve Bank has left it at since August 2016.

This is the 13th rate cut in this rate cutting cycle dating back to November 2011 when rates were at 4.75 per cent.

In a speech made at the Reserve Bank Board Dinner, the governor refused to rule out further rate cuts.

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“The board has not yet made a decision, but it is not unreasonable to expect a lower cash rate. Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year,” said governor Philip Lowe.

Chief Economist for AMP Capital Shane Oliver was not surprised by yesterday’s announcements, as he believes Australia will have enough three rate cuts by mid next year.

“More rate cuts are likely to be needed ultimately taking the cash rate to a low of 0.5 per cent next year. Ideally, this will be combined with more fiscal stimulus,” said Mr Oliver.

What drove the rate down?

According to Mr Oliver, economic growth has been hit with a variety of factors, including a housing downturn, a national drought and threats to global growth from the US trade war.

This in turn has seen the unemployment rate deteriorate with a combined unemployment and underemployment rate of 13.7 per cent, which in turn led to low wage growth and inflation falling below the national target of 2-3 per cent.

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Predictions roll in for how low rates can go
Shane Oliver
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