Speculation that Australia’s central bank will lower interest rates this year has been on the rise during recent weeks. In fact a recent Reuters poll had shown that a steep downturn in the housing market was likely to further hit domestic activity.
But the Reserve Bank of Australia (RBA) is still confident about the A$1.9 trillion economy, which has managed to avoided a recession since the early 1990s and has shifted away from its long-held tightening bias and put rate cuts back on the table.
In addition, awaiting a pick-up in inflation and a further drop in the jobless rate, the RBA has left policy at a record low 1.50% since its last easing in Aug’16. And according to a survey completed by Reuters covering 45 economists, this record period of holding may stretch into early 2021.
However, 20 economists that contribute 44 % of the survey participants forecast at least one cut to the cash rate in 2019 which is double the percentage predicting the rate cut during February Survey. In fact Westpac, NAB, Macquarie, Perpetual, UBS, JPMorgan and Nomura AMP are also tipping cuts this year.
On the other hand, if one looks at the overall economic picture, the Australian consumers are already battling a double whammy – a quick downturn in the property sector and wages growing at snail’s pace that raises the risk of an interest rate cut as soon as next month. The consumer and business confidence survey also confirms the weakening in the Australian economy lately.
Although the RBA may be appearing neutral in its commentary but the continued inflow of poor data make one think that the odds of no change versus a rate cut look fairly even.
In parallel, the government is scheduled to deliver the federal budget on 2nd April and is expected to announce personal income tax cuts and infrastructure spending ahead of general elections due in May which may come as a huge respite to RBA Governor Philip Lowe who is under intensifying pressure to end a 2-1/2 year pause as tumbling house prices hit households and slow economic growth.
Our analysts are of the opinion that with rates already at a record low, the impact of further easing may not help. Whereas tax cuts and cash disbursements could stimulate the economy effectively.
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