RBA to cut interest rates twice in 2016

Interest rates will drop 0.5% in the first half of next year according to the ANZ Bank.

A shift in the balance of risks in Australia has prompted the Bank to forecast that the RBA will ease rates twice more, in the first half of 2016.

Their economic update today said:interest rates

We now expect the RBA to cut the cash rate by a further 50bps next year, taking the cash rate to 1.50%.

Pinpointing the timing of the cuts is tricky, but we are pencilling in 25bp cuts in February and May at this stage.

Since the RBA cut the cash rate by 50bps earlier this year, we have consistently characterised the risks as being towards further monetary policy easing at some stage.

We are now making that our central case.

The change of view has largely been driven by two factors:

And our judgement that growth will not be sufficient over 2016 and 2017 to eat into spare capacity in the economy. Hence, extra policy support will be needed.

1. First, we recently downgraded our global growth forecasts to ‘more of the same’ from previously expecting a modest pick-up.

The downgrade reflects a softer profile for EM growth. Gaining traction in global growth has remained difficult despite very accommodative monetary policy globally.

The fact that ‘everyone’ has wanted a lower currency is telling in our view.

Risks to growth in Australia’s major trading partners in Asia, and Australia’s terms of trade, are skewed to the downside, with China in particular facing several significant challenges.

ANZ trading partner growth

2. Secondly, while current momentum in Australia’s non-mining economy is sufficient to keep the RBA ‘content’ this year, we see waning support to non-mining growth from housing market activity and the sharply lower AUD next year.


Governor Stevens has previously noted that growth in the non-mining economy needs to be above average for a couple of years to eat into spare capacity – at best it is currently around average with little prospect of improving much in our view.

At the same time, mining investment has much further to fall.

With this backdrop, it is difficult to see how inroads can be made into an elevated unemployment rate.

Even an expected unchanged jobless rate for two years – as currently forecast by the RBA – would ultimately be very uncomfortable for a central bank, especially if asset prices are flat and domestic interest rates are above global levels.

The economic backdrop we have outlined above points to greater risk that unemployment worsens rather than improves over the next 12-24 months.

Governor Stevens’ ‘path of least regret’ suggests he will need to cut rates again.

Where could we be wrong?

  1. A large China stimulus, but this would represent just a delay and could eventually make things worse if it furthers inflates imbalances in their economy.
  2. Momentum in the non-mining economy persists for longer than we expect. We actually expect most domestic activity indicators to remain relatively solid over the next few months; it’s next year where we see things softening.

RBA to cut rates

Source: ABS, RBA, ANZ Research

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Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

'RBA to cut interest rates twice in 2016' have 4 comments

  1. September 24, 2015 @ 7:59 pm Scott

    It’s coming…..

    Never been a better time to buy!



    • September 25, 2015 @ 9:09 am Phillip Danze

      How do you think APRA and the banks will treat any rate reduction pass through when it comes to investment loans; cuts earlier in 2015 have been wound back recently by the banks :-( ?


      • September 25, 2015 @ 9:50 am Michael Yardney

        Good question Phillip – we’ll have to wait and see, but it’s likley they’ll retain their policy of restricting investor lending ensuring the lower rates down fuel another round of speculative investing


      • December 23, 2015 @ 12:14 pm Gotcha

        The banks are doing their own thing now. Profits are expected even in stale economies. So the question you shouldn’t be asking is “What is the RBA doing?” but “What are the banks doing?”.

        A cut to the official rate no longer means the banks will follow, in the current depressed environment it’s likely they’ll do the opposite.


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