Interest rate cuts are coming, but how many?
Interest rate cuts are coming, but how many?

Rates could hit ‘terminal’ 0.5 per cent

It's all but guaranteed the Reserve Bank will cut the cash rate for the first time in nearly three years on Tuesday - but how low will it go?

Economists are virtually unanimous in predicting a 25 basis point cut at the RBA's June meeting that would bring the cash rate to a new record low of 1.25 per cent.

A further cut to 1 per cent is widely expected in August.

Westpac chief economist Bill Evans last week went one further, predicting that weak gross domestic product (GDP) growth, falling house prices and rising unemployment would force another cut in November to 0.75 per cent.

"Our forecasts for employment, wages growth, economic growth, inflation and conditions in the housing market are consistent with the need for policy to ease through the full course of 2019," Mr Evans told The Guardian.

"We see the unemployment rate drifting up to 5.4 per cent by year's end, economic growth at 2.2 per cent for 2019, underlying inflation at 1.4 per cent, and the housing market still weak although approaching stability. Our central forecast for the terminal cash rate in this cycle is 0.75 per cent with risks to the downside."

JP Morgan chief economist Sally Auld was even more pessimistic yesterday, telling The Australian Financial Review she saw rates hitting 0.5 per cent by 2020.

"We think the call for a terminal cash rate of 0.5 per cent makes sense given the cyclical and structural backdrop for the Australian economy," Ms Auld said.

"We can't be definitive that 0.5 percentage points is the effective lower bound for the policy rate in Australia. It may well be lower, and we suspect policymakers are open-minded about this possibility given the experience in other developed market economies."

Ms Auld based her prediction on a worsening global outlook.

"Envisage a scenario in which the Federal Reserve is cutting in response to weaker growth - in such circumstances the RBA is unlikely to stop at 50 basis points of easing," she said.

"It goes without saying that a weak domestic economic backdrop leaves the RBA very vulnerable to global disappointments."

REA Group chief economist Nerida Conisbee, however, believes it's "next to impossible we'll see four cuts".

"If we did the economy would be going terribly," she said.

"If that was to happen the US-China trade war would be massive and we would be seeing rapidly rising unemployment. It would be a pretty dire economic situation if we had four cuts.

"Although property does benefit from rate cuts and property won't be hit as much as retail trade, lots of people losing their jobs would be very, very bad news for property."

 

frank.chung@news.com.au



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