RBA expected to cut rates again

A growing band of top economists expect the Reserve Bank to take a razor to interest rates again next week, amid further signs the economy is deteriorating.

All 17 economists surveyed by AAP expect the RBA will deliver at least one more rate cut in 2015, taking the cash rate to a new record low of two per cent.

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Eleven of those economists expect that cut will happen on Tuesday, following on from February’s 25 basis point cut to 2.25 per cent.

Commonwealth Bank, ANZ, Westpac and AMP Capital are among those forecasting a March cut, with the general consensus being the RBA tends to deliver cuts in pairs.

“Usually when they cut rates, they don’t just do one out of the blue and stop. It’s normally two,” Commonwealth Bank senior economist Michael Workman said.

The RBA is not short of reasons to cut.

Unemployment has hit a 12-year high of 6.4 per cent, business investment expectations have reached shockingly weak levels and cheap petrol is expected to push inflation below the RBA’s two-to-three per cent target band.

On top of that, the Australian dollar has been edging higher, touching 79 US cents this week.

“The currency moving up is equivalent to wiping out the beneficial effects from lower interest rates,” Mr Workman said.

“It impacts quite severely on anybody that competes with imports and it also tends to make you, as a consumer, see overseas travel as cheaper and purchases over the internet as more cost effective.

“The combination of low interest rates and a currency closer to 70 US cents seems to be the RBA’s preferred option.”

The Australian dollar’s movement, and how low the RBA could ultimately cut the cash rate, may depend on when the US Federal Reserve begins hiking its interest rates.

The Fed is expected to begin hiking around the middle of the year, but any delays could push the Australian dollar higher.

Westpac chief economist Bill Evans said one rate cut alone would not be sufficient to support demand, and would seem “too timid a response”.

The cash rate would certainly be cut by May, but a March cut would make more sense he said, and the RBA should clearly leave the door open to further cuts.

“The policy approach to ensure maximum easing in financial conditions would be to cut rates by 25 basis points and adopt an explicit easing bias,” Mr Evans said.

“That bias might not need to be acted on but such a policy would ensure maximum downward pressure on the Australian dollar.”


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