RBA expected to hold while cuts play out

The Reserve Bank looks likely to hold the cash rate at a record low 1.0 per cent this week while it gauges the effect of the past two months’ cuts.

But most economists don’t see board members waiting long before taking a knife to the rate again.

“The RBA is waiting to see the impact of its June and July rate cuts and the federal government’s tax cuts for low and middle income earners, and in particular it wants to see lower unemployment,” AMP chief economist Shane Oliver said.

“We doubt that the policy easing seen so far will be enough to get unemployment below 4.5 per cent and wages growth and inflation up to target, and so expect the RBA to resume cutting later this year.”

That view is widely shared among economists and the futures market has apparently concurred, with pricing suggesting a cut at Tuesday’s meeting is off the table but another 0.25 percentage point cut is certain by November at the latest.

The opinion stems at least in part from RBA governor Philip Lowe’s language when the bank delivered the second of its two consecutive 0.25 percentage point cuts in July.

Dr Lowe signalled the RBA would adjust rates again “if needed”, which was widely interpreted as the central bank adopting a watching brief after it shifted the rate from nearly three years at 1.5 per cent.

Dr Oliver expects the RBA to next cut in November and again in February, while Westpac’s Bill Evans agrees on February but is tipping October for the first move.

Mr Evans predicts unemployment to trigger the cut and for the rate to hit 5.4 per cent by the end of the year.

The unemployment rate held at a seasonally adjusted 5.2 per cent in June, with the RBA still keeping an eye on the spare capacity that is keeping a lid on wage growth and putting downward pressure on inflation.

Inflation has stayed stubbornly below the RBA’s preferred range of 2.0-3.0 per cent for some time but Dr Lowe has said lowering the target to make it easier to hit in the new low-interest paradigm would damage Australia’s credibility.

While August doesn’t look likely to provide another cut, it should provide some guidance for when the next might come.

The picture should become clearer with Thursday’s release of the RBA’s Statement on Monetary Policy, which will include the bank’s updated forecasts for economic growth, inflation and unemployment.


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