Australian banks reckon interest rates will be slashed to 0.5% as RBA warns it won’t back down

This time will be different. Maybe. Picture: Getty Images
  • The governor of the Reserve Bank of Australia (RBA) has suggested the official interest rate in Australia could continue to plummet lower, as the Australian economy continues to look for stimulus.
  • Lowe’s comments came one day after Westpac chief economist Bill Evans warned that it could fall as low as 0.5% by early next year.
  • Westpac’s changed forecast means both it and AMP Capital are expecting 0.5% interest rates, while other economists remain unsure about the benefits of interest rate cuts.

The Reserve Bank of Australia (RBA) has warned it will do what it can to grow the Australian economy even if that means slashing interest rates even further.

Addressing economists at an Anika Foundation lunch on Thursday, RBA governor Phillip Lowe said his central bank would continue its best efforts to get inflation — the rate at which the economy is growing — to its long-term target range of 2-3%.

“Over the nearly 30 years we have had the inflation target, inflation has averaged 2.4 per cent, very close to the midpoint,” Lowe said, stressing the importance of the target.

The Australian economy, however, has been growing below that for some time, he admitted.

“Over the past four years, headline inflation has mostly been below 2 per cent… (and) in underlying terms, inflation has been below the band for three years.”

As the unemployment rate rose to 5.2%, that sluggish growth became more concerning, with the RBA deciding to stimulate it by cutting the official interest rate. In lowering the rate, the RBA makes it cheaper to borrow money, generally increasing spending as a result which flows into the economy.

The official interest rate in Australia (Source: RBA)

In just the last two months, the RBA has slashed the interest rate twice, reducing it to 1%.

“These two recent reductions in the cash rate will support demand in the Australian economy. So too will recent tax cuts, higher commodity prices, some stabilisation in the housing market, ongoing investment in infrastructure and a lift in resource sector investment,” Lowe said.

However, the longevity of commodity prices and property market stability, as well as the effectiveness of the recently approved personal tax cuts are not guaranteed. If a combination of these factors don’t get the economy moving, Lowe made it clear the RBA is willing to cut further.

“If demand growth is not sufficient, the Board is prepared to provide additional support by easing monetary policy further,” he said.

That sentiment certainly reinforces the consensus of economists.

On Wednesday, Westpac chief economist Bill Evans announced the bank was now expected rates to fall to 0.5% by February 2020.

Westpac’s expectations match those of AMP Capital chief economist Shane Oliver and Capital Economics’s Marcel Thieliant.

Other economists are less certain the RBA will cut below 1.0% as cuts below that level are generally considered less effective.

Either way, Lowe made it clear on Thursday that interest rates certainly look to remain around current low levels for the foreseeable future.

“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the target range,” he said.