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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, General

There was general agreement that last week’s RBA board meeting had the potential to deliver a rate cut for the first time since August 2016. In the end, the RBA decided to leave the cash rate at the record low of 1.5% and in the language of economists, a low inflation outcome was a “necessary” but not “sufficient” condition for a rate cut. The RBA has always been careful to tie the direction of interest rates to the unemployment rate as well. Along with low inflation, the RBA wants to see how the labour market evolves.

The August RBA Board meeting is now looking good for the RBA move. By August, the RBA will have March quarter GDP and wage reports, June quarter CPI and three additional employment reports (April, May and June) to digest. If the unemployment rate only tracks sideways, with notably slower employment growth over the next three months and June quarter CPI shows no sign of rising, economists predict the RBA will be ready to shift rates lower.

The RBA Board no doubt debated the effectiveness of an interest rates cut and whether rate cuts are the appropriate policy tool to deal with the weakness in household disposable incomes. I don’t know how much of an official rate cut would actually be passed through to borrowers as a bank’s funding costs are only partly driven by the official cash rate. Furthermore, a rate cut, to the degree it is passed through to lower deposit rates, is even more significant for savers, many of whom are retirees, where saving rates are already very low.

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Source: Rural Bank

 

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