Weakening economy could lead to a rate cut this year

The economy might be weaker than expected, which could lead to a dramatic change of plan for the official cash rate.

The Reserve Bank of Australia admits the economy may be weaker than expected, which may lead to a rate cut.

The central bank on Monday kept the rate at a record low of 1.5 per cent for 30 consecutive months in the wake of the banking royal commission’s damning report into the finance sector and accelerating house price declines in Sydney and Melbourne.

RBA boss Philip Lowe said he welcomed recommendations from the banking royal commission.

For months on end, governor Philip Lowe had maintained a lift in the cash rate was the most likely move, but he told the National Press Club in Sydney today the RBA might need to change this outlook.

“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down,” Dr Lowe said.

“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios.

“Today, the probabilities appear to be more evenly balanced.”

The RBA boss said his decision would be largely dictated by the unemployment rate, which

is currently at 5 per cent.

The cash rate reflects what the central bank charges commercial banks on overnight loans and influences all other interest rates.

“If Australians are finding jobs and their wages are rising more quickly, it is reasonable to expect that inflation will rise and that it will be appropriate to lift the cash rate at some point,” Dr Lowe said.

“On the other hand, given the uncertainties, it is possible that the economy is softer than we expect and that income and consumption growth disappoint.

“In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this if needed.”

According to a poll of 28 experts and economists by comparison website Finder.com.au, just 40 per cent now believe the next move will be up, compared with roughly 80 per cent for the past two years.

“This is the most dramatic shift I have seen in four years of running our cash rate survey,” Finder.com.au insights manager Graham Cooke said. “Economists are now swinging significantly in favour of a cut this year, but nobody can agree on exactly when this will happen.”

Commissioner Kenneth Hayne and Treasurer Josh Frydenberg’s frosty media shoot before the banking royal commission’s final report was released.

The average owner-occupier mortgage rate has risen 14 basis points since September last year. The average variable rate now sits at 4.37 per cent, according to Canstar, with the lowest 3.54 per cent and the highest 5.59 per cent.

“If we see mortgage rates rising more broadly, we might see the RBA become more willing to consider a rate cut in an effort to offset higher funding costs and support heavily-indebted household balance sheets,” CoreLogic head of research Tim Lawless said.

Dr Lowe said both the global and Australian economy would grow at a reasonable rate, but the continued weakening of the property market would present the greatest threat to the local economy.

With this in mind, he said he welcomed the banking royal commission’s final report in relation to resisting further tightening on lending restrictions.

“The commission’s recommendations that bear on credit provision are balanced and sensible and should remove some uncertainty,” Dr Lowe said.

“I also welcome the commission’s focus on the importance of service — as opposed to sales — in the financial sector, the necessity of dealing properly with conflict of interest issues, and the importance of accountability when things go wrong.

“Addressing them is central to rebuilding the all-important trust in our financial system.”

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