How will the further RBA rate cuts impact the economy?

Team Veye | 19-Aug-2019 RBA rate cuts

Australia has managed to avoid recession for a record-breaking 28 years, but this run of good fortune cannot continue forever. For over twenty years the mining boom and housing boom have been the main drivers of the economy.

Unemployment continues to rise and inflation remains weak. While Inflation has stayed below the RBA’s preferred range of 2 to 3 percent for some time, the central bank has raised its unemployment forecast from 5 to 5.25 percent for this year and next.

It seems doubtful to many leading economists that policy easing so far will be enough to get unemployment below 4.5 percent and wage growth and inflation up to the desired target.

In this background, the chances of further rate cuts appear very high following the release of the Reserve Bank’s latest quarterly Statement on Monetary Policy last week. The RBA seems to be reviewing the impact of its June and July rate cuts and the Federal Government’s tax cuts for low and middle-income earners.

RBA governor has also hinted that the RBA would adjust rates again “if needed”, which was interpreted as the central bank adopting a watching brief after it shifted the rate from nearly three years at 1.5 percent. He further indicated his tough stance to stimulate Australia’s economy by saying that all options were on the table.

Recently, four countries – New Zealand, India, Thailand, and the Philippines – cut their official rates, with more nations likely to follow suit.

The rate cut has acted as a double-edged sword thus far. The rate cut while bolstering the economy has had its impact on the Australian dollar. The Australian dollar hit a ten year low against the US dollar. That could be hurting our miners; our agricultural sector and our tourism and education sectors the most.

Despite all these measures, the RBA has lowered its GDP forecast from 2.75 to 2.5 percent for the year to December 2019. However, it has lifted June 2021 forecast from 2.75 to 3 percent.

With many other countermeasures, good times could not be being very far. The economic slowdown may be on the verge of receding as many of the negative factors that are pulling down growth are starting to fade.


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