The RBA just cut rates for the first time in years — here's what economists think the bank will do next

Spencer Grant/Getty ImagesIt’s been a while since the RBA last cut rates.
  • The Reserve Bank of Australia (RBA) has cut official interest rates for the first time since August 2016.
  • The cash rate was reduced by 25 basis points in June to a new record low of 1.25%.
  • Economists universally expect a follow-up cut rate cut later this year. Opinion is divided as to whether the RBA will cut the cash rate below 1%.

The Reserve Bank of Australia (RBA) has cut official interest rates for the first time since August 2016, delivering a 25 basis point reduction in the cash rate in June, leaving it at a new record low of 1.25%.

However, that was entirely what almost everyone was expecting.

Economists were on board and financial markets were fully priced for a cut — it was as close to a “lock” as one could get.

The real question today was whether this would mark the start of a series of rate cuts, potentially seeing the cash rate fall to 1% or lower.

Even before the RBA move today, financial markets had a cumulative 70 basis points of policy easing priced in by the middle of next year, implying the cash rate could be reduced another two times during this period.

RBA Governor Philip Lowe stopped short of saying the bank will definitely cut rates again, suggesting the bank will “continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time”.

Not a definitive answer by any stretch, but it does signal the bank is prepared to do more should the economy require it.

Now that they’ve had time to digest the June statement, here’s a selection of economist views on what the RBA is likely to do next.

Bill Evans, Westpac Bank

The Governor has left open the prospect of further action. Westpac expects that there will be further cuts in this cycle in August and November. It is possible that the Board might choose to bring forward the cut we expect in August to July in the event of a particularly disappointing employment report on June 13. However, we expect that given the limited policy flexibility available, the prudent approach will be to await more information and provide a full explanation of the next cut at the August meeting.

However, the key point from our perspective is the clear message that more work needs to be done and only one more cut will be seen as insufficient.

The labour market will remain the key focus for the policy profile, and the two additional cuts that we anticipate in August and November are consistent with our more downbeat view on the labour market.

Sally Auld, J.P. Morgan

We expect the RBA has further to go from here. We are forecasting the next 25 basis point rate cut in August, and a further 50 basis points of easing in the first half of 2020.

The policy guidance was dovish, providing the Bank with maximum flexibility to react to developments in coming months.

Shane Oliver, AMP Capital

The RBA’s latest rate cut is aimed at heading off a further slowing in growth which would threaten higher unemployment and lower for longer inflation.

More rate cuts are likely to be needed ultimately taking the cash rate to a low of 0.5% next year. Ideally this will be combined with more fiscal stimulus. For investors it means low interest rates for even longer.

Stephen Halmarick, Commonwealth Bank

We expect today’s rate cut to be followed up with a further 25 basis point easing, to 1.0%, at the August 6 RBA Board meeting. This will follow on the heels of the Q2 CPI report, which is expected to show an ongoing underlying inflation rate well below the 2%-3% target range. The RBA will then be able to follow this rate cut with an updated assessment of the economic and policy outlook at the 9 August Statement on Monetary Policy.

Financial markets are currently pricing in the risk that the RBA cash rate will be pushed below 1% in 2020, with a subsequent risk of a move into unconventional monetary policy. Our view is that such an outcome would require an economic scenario that is considerably more bearish than our own forecasts.

Annette Beacher, TD Securities

A more pragmatic RBA and early signs of a post-election rebound in confidence and housing activity implies that consecutive cuts remain highly unlikely. The RBA can afford to wait and assess the impact of today’s rate cut, and whether improved optimism translates into better outcomes for retail sales and employment.

We pencil in a follow-up August cut, with fiscal policy likely to take care of the other 50 basis points of easing that the markets and some analysts are looking for.

David Plank, ANZ

The bank’s forward guidance [on the outlook for policy settings] is explicitly conditional. The next move has not been pre-ordained, it will depend on the data. This may disappoint some of those who thought the RBA had already decided to cut a number of times. The focus on making “faster progress in reducing unemployment” sets a high hurdle for NOT easing again, however.

While we think there will be a further easing in coming months, our view is that the RBA will display some patience given it doesn’t have a lot of policy space.

If some of the key forward indicators display notable improvement then the RBA may sit pat for a period even if the unemployment holds around current levels. If they don’t, it will go sooner.

Ivan Colhoun, NAB

NAB forecasts a further reduction in the cash rate to 1% at the Bank’s August Board meeting, and the risk of a further reduction in the first half of 2020. This reflects the view that the somewhat slower growth in prospect will require further monetary stimulus. It’s quite possible that the Government will begin to contemplate some further fiscal support as well later in the year if current trends continue.

The Board retains an easing bias, standing ready to further support the economy and employment.

Marcel Thieliant, Capital Economics

The analyst consensus is that the Bank will follow up with another 25 basis point cut in August and then remain on hold. However, we think that the analyst consensus remains too upbeat about the outlook for GDP growth. While the median GDP growth forecast for 2019 is 2.2%, our forecast of a 1.5% increase puts us at the very bottom of the analyst consensus.

Admittedly, the start of the RBA’s rate cutting cycle is probably heralding the end of the housing downturn that has been the main headwind to activity. We now expect house prices to start rising from early next year. But the prospect of rising house prices doesn’t mean that the RBA is done easing. The RBA has lowered interest rates even when house prices where already rising following seven out of the last eight housing downturns.

Our view is that the RBA will cut the cash rate to 0.75% before the year is out.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.