Australia's economic community is fracturing on what the RBA will do next

Having been near-united that the RBA would cut rates in May, Australia’s economic community are now splintering in their views as to what the RBA will do next.

We know what Goldman Sachs’ head of Macro Research in Australia and New Zealand, Tim Toohey, thinks – he is leaning towards another cut, probably in August.

Is his view consensus or contrarian at this point? We look at the views of some of the best economic minds in the business below to find an answer.

UBS economists Scott Haslem and George Tharenou believe that, having cut to 2% today, the RBA easing cycle is now over.

“While the RBA followed their normal practice of providing no ‘forward guidance’ on policy at meetings where they actually move rates, the reaction of the AUD, suggests some may have been disappointed by the lack of an ‘explicit easing bias’. Nonetheless, we continue to argue that based on Governor Stevens recent speech, we think that 2.00% is the trough, and the RBA will be on hold ahead”.

Like UBS, Commonwealth Bank economists Michael Blythe and John Peters believes rates are now likely to remain on hold.

“The Statement accompanying today’s decision has only a modestly dovish slant and lacked much in the way of forward guidance. The plea/desire for a lower AUD remains. Concerns about the capex downturn remain. House prices may still be rising too quickly in Sydney but trends are more varied elsewhere. The lack of concern about the inflation outlook is also still in evidence. So it may be too soon to definitively call the end of the cycle. But we suspect that the RBA will be very reluctant to move below 2%. The lack of forward guidance fits in with the idea of this reluctance as does the talking up of household spending”.

Westpac’s chief economist Bill Evans agrees that while the RBA’s easing cycle is likely over, risks remain to the downside.

“For our part the next significant date will be the November Board meeting. By that time the Bank will have sufficient information around the momentum in the economy through 2015 for it to assess whether its relatively positive outlook for growth in 2016 can be sustained. Our current forecast is that despite an ongoing drag from mining and non-mining business investment there will be a sufficient lift in household demand (both consumption and dwelling investment) to justify a 3% growth rate in 2016. However, with record weak income growth, fragile confidence and ongoing headwinds from fiscal policy the risks to this outlook are to the downside”.

ANZ’s chief economist Warren Hogan suggests that while risks to rates remains to the downside, if there is going to be a further cut, it’s unlikely to happen any time soon.

“We currently expect the cash rate to remain at 2% for the time being. We will wait until Friday’s quarterly Statement on Monetary Policy to update our views. At present though we still feel the risk is for lower rates in Australia, although we doubt the RBA will contemplate another cut until much later this year or early next year”.

While most suggest that the RBA won’t cut again, Capital Economics chief Australia and New Zealand economist Paul Dales agrees with Goldman, suggesting there could be more than one additional cut from the RBA this year.

“The cut in interest rates to a new record low of 2.00%, from 2.25%, announced by the Reserve Bank of Australia (RBA) today is unlikely to be the last in this cycle. Our forecast that both GDP growth and underlying inflation will be weaker this year than the RBA expects suggests that rates could yet fall to 1.5% by December”.

So there we have it. Based on these select early views we have three on hold, two cuts and one maybe. That’s distinct change to what was seen prior to today.

With the RBA’s statement on monetary policy delivered Friday, along with retail sales tomorrow and employment data Thursday, there’s a high chance we’ll have a further splintering of views in the days and week’s ahead.

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