RBA forecasts scream more interest rate cuts

A trader works on the floor of the New York Stock Exchange. Picture: AP

Just about every metric that is important to the Reserve Bank of Australia is screaming out that further interest rate cuts will be needed to restore the misfiring economy to cruising altitude.

The RBA kept interest rates on hold at a record low 1 per cent at a policy meeting on Tuesday, but painted a moribund economic outlook that did little to inspire belief in the idea that it is done easing the monetary policy reins.

In announcing the on-hold decision, RBA Governor Philip Lowe lifted the lid on revised forecasts that has GDP growth remaining too weak to drive unemployment lower, while the moment that inflation returns to the midpoint of the 2-3 per cent inflation target isn’t even on the distant forecast horizon.

All this mediocrity comes as the trade war between the US and China escalates at an exponential rate, toppling global equity markets and dashing business confidence.

Lowe downgraded the RBA’s forecast for GDP growth in 2019 to 2.5 per cent from 2.75 per cent, while adding “the unemployment rate is expected to decline over the next couple of years to around 5 per cent.”

The RBA recently went to great lengths to tell markets that an unemployment rate of 4.5 per cent or lower is needed to spark wages growth and get inflation back to target. The jobless rate currently hovers at 5.2 per cent, and has been drifting higher, not down. Spare capacity in the job market remains significant.

Lowe will go before a parliamentary economics committee on Friday where he is likely to put the case again for more government spending on infrastructure to help kickstart the economy, while fanning the view that the official cash rate will eventually move below 1 per cent.

Those cuts might take a little longer to arrive than earlier predicted given that RBA is now selling the idea interest rates will stay lower for longer.

“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target,” Lowe said in his policy statement.

That use of what economists call “explicit forward guidance” is already helping to do things like push the Australian 10-year government bond yield below 1 per cent for the first time.

Still, the trajectory for GDP growth, inflation and employment suggests the RBA will top up its June and July cuts with at least one more around November.

Bill Evans, chief economist at Westpac, (who has called this cycle of interest rate cuts masterfully), said the next cut could come as early as October.

Income tax cuts in July and the impact of falling mortgage interest rates will give the RBA some scope for a longer pause, but Evans says he remains comfortable with the forecast that the next rate cut will come at the October meeting and lay the foundation for another move in February.

Sally Auld, chief economist at JP Morgan (who has also called the cuts well) still has two more interest rate cuts forecast over the next year.

She said the RBA has forecast a slower return to the bottom of the inflation target, which was unexpected. It supports the idea that interest rates will be cuts further.

Write to James Glynn at [e-mail]

Dow Jones Newswires