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Reserve Bank flags more rate cuts

by James Mitchell11 minute read
The Adviser

The Reserve Bank’s statement on monetary policy for February suggests the cash rate is still not low enough.

Prior to the February board meeting, the cash rate had remained at the same level since August 2013.

The RBA observed that interest rates faced by households and firms had declined a little over this period, and that very low interest rates have contributed to a pick-up in the growth of non-mining activity.

The recent large fall in oil prices, if sustained, will also help to bolster domestic demand, it said.


“However, over recent months there have been fewer indications of a near-term strengthening in growth than previous forecasts would have implied.

“Hence, growth overall is now forecast to remain at a below trend pace somewhat longer than had earlier been expected.”

Accordingly, the RBA expects the economy to be operating with “a degree of spare capacity for some time yet, and domestic cost pressures are likely to remain subdued and inflation well contained".

In addition, while the exchange rate has depreciated, it remains above most estimates of its fundamental value, particularly given the significant falls in key commodity prices, and so is providing less assistance in delivering balanced growth in the economy than it could, the central bank argued.

The RBA’s observations are in line with those of leading economists, who are anticipating another rate cut as early as next month.

Domain Group senior economist Andrew Wilson said another cut is likely, given that the economy received minimal stimulus from the succession of rate cuts between October 2011 and August 2013.

“We haven’t had much action from cutting from 4.75 per cent to 2.5 per cent, so I’m not sure what a 0.25 per cent improvement is going to do,” Dr Wilson told The Adviser.

“Certainly the Reserve Bank had to act – it’s really the only tool in the box that we’ve got left,” he said.

AMP Capital chief economist Shane Oliver said the Reserve Bank had been forced to cut rates – and that there were good reasons for it to cut again.

“Growth is too low, running at around 2.75 per cent through last year, which is well below potential of around 3.00 to 3.25 per cent, and the level needed to prevent a rise in unemployment,” he said.

“Confidence is subdued, having well and truly given up the post-2013 federal election boost.

“Partly reflecting this, consumers have started to become more focused on paying down debt again, which is a sign of increasing caution and will threaten spending if sustained.”

Mr Oliver said the Reserve Bank would also be feeling the pressure from the rate cuts being made by the central banks of many other countries.

“To the extent it is forcing monetary easing around the world, it adds to confidence that sustained deflation can be avoided. Australia is not immune,” Mr Oliver said.

“As the Reserve Bank wanted to see a continued broad-based decline in the value of the Australian dollar, it had to re-join the easing party lest the Australian dollar rebounded.”

While the economy continues to cool, homeowners are expected to benefit as lower fuel prices and cheaper lending rates put more money in their pockets.

All four of the major banks have now passed on the RBA rate cut in full.

[Related: 'Lowering the tax rate would curb negative gearing']

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