Recovery Watch: Economists tip rate cuts next month

The Reserve Bank of Australia has signalled it has the room and the inclination to cut interest rates, with most economists now expecting a rate cut in October and potentially another in November.

The RBA said in the minutes of its September board meeting that “developments since the previous board meeting suggested that the global economy remained subject to significant downside risks. Of particular note this month was the recent sharp decline in some bulk commodity prices.”

It also noted the outlook in Asia is worsening: “Ongoing weakness in the advanced economies appeared to be weighing on exports from Asia.” The Bank also highlighted that the Indian economy may be facing “structural impediments to growth”.

ANZ’s economics team said it has “changed our monetary policy call and expect the RBA to lower the official cash rate by 25 basis points on October 2 and 25 basis points on November 6 and to maintain an easing bias thereafter.”

Two cuts would take the official cash rate from its current level of 3.5% to 3%.

“We previously expected a rate cut in November and early next year,” the ANZ team said.

“The main reasons for the change of view are that lower commodity prices, coupled with the persistently high Australian dollar and further fiscal tightening will have a significant contractionary effect on the economy. It is also likely in our view that growth is less sensitive to interest rate moves than previously.

“With inflation comfortably at the low end of the Bank’s target band, global growth continuing to moderate and leading indicators of unemployment deteriorating, there is no reason for the RBA to wait another month to ease policy and overall financial conditions.”

Rate cuts are always welcome, but the tenor of the RBA’s minutes is a little concerning.

It is warning that the global slowdown is still far from over, and Australia’s ability to perch itself on the back of strong Asian growth could be somewhat stymied by slowing economies in Asia.

There is also more than a niggling concern about what the ANZ team see as a lack of effectiveness of rate cuts – that is, the cuts we’ve had haven’t moved the growth needle as expected.

Still, we’ll take whatever rate cut we can get right now.