Rate-cut talk has sweep through global financial markets with the US Federal Reserve chairman Jerome Powell saying he was prepared to take action if trade tensions weighed on the US economy – increasing speculation of a possible US rate cut.
This follows last week’s RBA rate cut, the first change to the official cash rate since 3rd August 2016 which has pushed interest rates to a new low of 1.25%. According to the RBA, the lower cash rate will “help make further in-roads into the spare capacity in the economy, assist with faster progress in reducing unemployment and achieve more assured progress towards the RBA’s inflation target”.
In a speech last week, the RBA Governor Philip Lowe explained that the RBA now believes the unemployment rate could fall to “4-point something” rather than the previous estimate of around 5%, also commenting that "the board has not yet made a decision, but it is not unreasonable to expect a lower cash rate".
Economists expect there to be a second 25 basis points cut in coming months, with the most popular timing being August, with opinion divided on how much further the RBA may go after that. Financial markets are currently pricing in the risk that the RBA cash rate will be pushed below 1% in 2020 – refer chart below.