Cash rate call for October revealed

Cash rate call for October revealed

AMP Capital, Shane Oliver

Yesterday afternoon, following its monthly board meeting, the Reserve Bank of Australia cut the nation’s official cash rate for the third time this year, bringing it down to 0.75%.

The move from the central bank continues the run of historic low rates in Australia, and it was largely in line with market projections.

Today’s move is obviously aimed at stimulating the economy. We have seen the Australian economy slow down to growth levels of just 1.4%, compounded by both rising trends in unemployment and underemployment. As long as that remains the case, it will be hard to get wages growth to pick up, as well as inflation. Given that backdrop, we understand why the Reserve Bank has taken rates down further for October.

Do we see more cuts coming in 2019? Yes we do, we have pencilled in another one for the November meeting next month. In addition, we also see another cut coming early next year, taking the official cash rate down to 0.25%.

The big question coming out of this series of cuts is: will it help economic conditions? It will likely provide some help, particularly as the banks will probably pass on this latest cut, albeit not in full across the board. That won’t prompt Australians to race out and borrow, as they used to, but it will mean the costs of servicing a mortgage decrease, which does help spending to some degree in the economy.

At the end of the day, we do need to see the baton passed on to fiscal policy to some degree, as we move into 2020. There is an increasingly important role for fiscal stimulus, and at this stage, it’s probably not something we will see until later this year, or early next year. We are getting to the point where monetary policy has done about as much as it can, with probably a little bit further to go. We might even see quantitative easing as we go into next year.

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