Why another rate cut is on the table

Interest rates could be dropped to just 2 per cent as soon as May 5.

Reserve Bank Governor Glenn Stevens dropped the hint in an address to the American Australian Association in New York. reserve_bank_rate_cut_17q11p0-17q11p6

Given the uninspiring macroeconomic outlook and an ongoing correction to Australia’s terms of trade, Stevens noted that monetary policy should be accommodative and “the question of whether they should be reduced further has to be on the table”.

Due concern was raised over trends in escalating household debt, although Stevens did also note that popular commentary has been “too focused” on Sydney while too little attention has been paid to the “more disparate trends” across the other 80 per cent of Australia.

Thus the Reserve Bank will look to offer support to demand, consistent with its mandate as expressed by the medium term 2 to 3 per cent inflation target.

Stevens pointed out that inflation is expected to remain consistent with the 2 to 3 per cent target range by latest forecasts.

A non-too-subtle reference was made in the address to the need for leading figures in government and business to step up, with “any help” from policies which might stimulate growth deemed to be welcome.

Headline inflation soft

The March or Q1 2015 inflation figures are due to be released tomorrow.

As discussed here previously, the “All Groups CPI” series has recently declined, tracking at just 1.7 per cent and below the bottom of the target range.

Moreover, market forecasts for the first quarter range from soft (0.5 per cent) to very soft (-0.1 per cent).

Westpac forecasts a “meek” 0.1 per cent print tomorrow, which would take the annual All Groups CPI figure down to a remarkably low 1.2 per cent, adding considerable weight to the case for further easing of monetary policy.

Underlying inflation

It should be recognised, however, that the expected soft inflation is largely to be driven by a collapse in petrol prices in the early part of this calendar year, as well as an element of post-Xmas discounting.

As noted here previously, the preferred and less volatile trimmed mean and weighted median inflation measures have been tracking within the target 2 to 3 per cent range, albeit towards the lower end thereof.

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The Reserve Bank’s own analysis has implied little inflationary pressure from either tradables or non-tradables, while the prospects of inflation from a wages breakout seem appear muted to say the least.

The Wrap

To date both the rhetoric and the actions of the Reserve Bank have remained conservative, indicating little willingness to be rushed into decisions.

The latest employment figures have offered signs of encouragement, but Stevens noted in his address that unemployment levels remain well above most estimates of “natural rates” or “NAIRUs”, while output is below conventional estimates of potential.

If you want to see a further rate cut, hope for a soft inflation result tomorrow.

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Pete Wargent


Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog

'Why another rate cut is on the table' have 1 comment

  1. April 24, 2015 @ 9:16 am Nigel Abery

    Great post. Glenn and the RBA board must be hoping that all their reteric about cutting rates will lessen the need for a cut. But in the end I think a cut will still be needed.


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