Should there be another rate cut?

Team Veye | 09-Sep-2019 rate cut

When some of the economists were favouring or even advocating for another rate cut, RBA’s decision to keep the official rates on hold at its historic low of 1% hasn’t surprised the industry. Now, what could be the rationale behind leaving the rates unchanged?

The decision though in line with the consensus forecasts comes after the RBA cut rates twice consecutively in June and July. Prior to that, the cash rate had been 1.5% for most of the three years.

RBA governor had earlier expressed the continuing disappointment due to growth in the Australian economy. He candidly admitted that the Australian economy had slowed.

While a rate cut now wasn’t too obvious, thaw in the US-China trade spat made it even more unlikely.

RBA had indicated that unemployment remains its major concern. The unemployment rate currently is 5.2%. Despite generating many new jobs last month, this figure is hardly moving. The central bank believes that full employment could be achieved at 4.5%.

The central bank believes that at this level wage growth will pick up followed by increased spending. Thus providing the much-needed stimulus. The market believes that an extended period of low-interest rates is required to help in reducing unemployment and achieve the desired inflation target.

As retail spending continues to be weak and GDP figures reflecting the same, markets are convinced that the RBA will cut rates around October, with another interest rate cut expected in 2020.


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