Finance Finance News What the Reserve Bank will do with interest rates on Tuesday

What the Reserve Bank will do with interest rates on Tuesday

reserve bank meeting
The RBA meeting will take place the same day as the federal budget. Photo: Getty
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With economic forecasts oscillating between recession and recovery and the government about to hand down its pre-election budget on Tuesday, The New Daily asked four experts whether they think the Reserve Bank will cut the cash rate at Tuesday’s monthly meeting.

Rebecca Cassells, associate professor with the Bankwest Curtin Economics Centre

Professor Cassells says given current economic data, it would be pre-emptive to change the cash rate, and thinks any decision – up or down – will be later in the year.

“The RBA will likely hold the cash rate at 1.5 per cent over the course of 2019 unless there’s a major global downturn – or the economy picks up faster than expected. Both are possible but not probable,” Professor Cassells says.

Despite much talk of a sluggish economy, she believes several signs indicate a “reasonably positive outlook”, highlighting strong employment growth and some of the lowest unemployment for some time in NSW and Victoria.

economists' view of RBA meeting on budget day
Rebecca Cassells. Photo: Curtin University

“The housing market is coming off, but the downturn in housing prices is linked to a needed correction, with housing markets being over-stimulated in previous years,” Professor Cassells says.

“But that’s not to say this sector shouldn’t be watched closely.”

While she thinks a recession caused by domestic circumstances is unlikely, “a sustained decline in the housing market, together with high indebtedness of Australian households and low real-wage growth, leaves the economy more exposed than it should be”.

Professor Cassells argues that this week’s federal budget, which is likely to contain fiscal stimulus through a combination of tax cuts and infrastructure spending, could also be a boost for the economy.

Tony Makin, professor of economics and director APEC Study Centre, Griffith Business School

Professor Makin believes there’s a 70 per cent chance the RBA will keep rates on hold.

He cites four reasons why the RBA won’t cut:

  • Global interest rates are still low, reflecting overseas central banks’ (the US Federal Reserve, European Central Bank, Bank of Japan) reluctance to increase them any time soon
  • Underlying inflationary pressures are not building, despite high employment growth and low unemployment, and wages growth, particularly in the private sector, is still flat
  • International trade growth in our major trading partners is also subdued due to rising global protectionism
  • A rate rise would strengthen the Australian dollar, which would worsen our international competitiveness and international trade risk

Stephen Anthony, chief economist with Industry Super Australia

Mr Anthony believes the RBA will hold, but will cut at least once, and possibly twice, before the year is out.

With unemployment sitting about 4.9 per cent and inflation stable, “or certainly not falling”, the RBA will argue that its policy of wait and see still applies and so will sit tight again, he says.

Stephen Anthony. Photo: ISA

What is also playing on their mind is that with a cash rate of just 1.5 per cent, they don’t have much scope “if things do get ugly”.

“What must be in the back of their mind is that they have very little room to move now and so will only pull the trigger on a cut when they absolutely have to – they don’t have a lot of wriggle room,” Mr Anthony says.

And things may well “get ugly”, he believes.

“The housing price correction is really scaring the horses and limiting confidence in the economy in general [as people see their wealth decline],” he says. “And this is building on top of a synchronous slowdown around the globe, with the US, China and Europe all slowing.”

To turn slow economic growth, Mr Anthony argues the government must embark on a serious “no regrets” infrastructure program in conjunction with the private sector, much of which could kick off soon.

Richard Holden, professor at University of New South Wales Business School

Professor Holden says while “it is looking increasingly like the RBA will need to cut in the short term”, he believes politics and the proximity to an election may dominate thinking when the board meets on Tuesday.

“Whether they cut on Tuesday depends on how much considerations of politics get in the way,” Professor Holden tells The New Daily.

Cutting rates on the day of a federal budget may be seen as having an influence politically. Cutting just before an election is also dicey, while cutting just after an election could also be seen as favouring the new government.

Professor Holden said while you can argue the case for a cut soon – “depending on the inflation figure” – the RBA won’t move until the latter half of 2019, and will cut by a total of 50 percentage points.

“If the fundamentals are such that they see the need to cut once [by 25 basis points], then they are also likely to cut twice by the end of the year,” he says.

The New Daily is owned by Industry Super Holdings

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