RBA Flags Two Rate Cuts, Downgrades Outlook

By Glenn Dyer | More Articles by Glenn Dyer

Australia will get two interest rate cuts this year totaling 0.50%, according to the second Statement of Monetary Policy for 2019 from the Reserve Bank.

In the statement, the central bank downgraded its domestic growth, employment, inflation, and other forecasts and broke with past practice and made it clear the new, lowered estimates were based on rate cuts:

“The domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate. The exchange rate is assumed to be around 2 percent below where it was at the time of the February statement. The oil price is assumed to remain 8 percent higher than at the time of the February Statement. The working-age population is assumed to grow by 1.7 percent per annum over the forecast period, which is a little stronger than previously assumed.”

Far more detail than in the February Statement On Monetary Policy – the first for 2019, where there was no mention of interest rate cuts and market pricing.

The domestic forecasts were based on:

“Technical assumptions include TWI at 62, A$ at US$0.72 and Brent crude oil price at US$63 per barrel…”

No mention of the forecasts being based on rate cuts and in other words a huge departure from the norm for the central bank. It means there will be two rate cuts this year – the first as soon as June.

In the second statement released on Friday the RBA said:

“Growth in the Australian economy has slowed and inflation remains low. Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction.

“Despite this, the labour market is performing reasonably well, with the unemployment rate steady at around 5 percent. Underlying inflation has been lower than expected, at 1½ percent over the year to the March quarter, with pricing pressures subdued across much of the economy.

“GDP growth is expected to be around 2¾ percent over both 2019 and 2020. This is lower than previously forecast, reflecting the revised outlook for household consumption spending and dwelling activity. Stronger growth in exports and, further out, work on new mining investment projects are expected to support growth.

“Forecasts for inflation have also been revised lower. Trimmed mean inflation is expected to be around 1¾ percent over 2019 and then increase gradually to 2 percent in 2020 and a touch above 2 percent by early 2021.

“In the near term, CPI inflation is expected to run a little above the rate for trimmed mean inflation, driven by the recent increase in petrol prices.”

Do much for all the boasting by Scott Morrison and Josh Frydenberg about a ’strong economy’. It’s not, but it is also not a basket case. The economy, however, looks like it is very sluggish and need of low-level life support from two rate cuts ASAP.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →