RBA expected to hold

Central bank waiting out effects of cuts

THE Reserve Bank looks likely to hold the cash rate at a record low 1.0 per cent this week as it gauges the effect of the past two months’ cuts.

Data out last week showed June quarter inflation rising to 0.6 per cent, which narrowly beat expectations but not by enough to ward off a further rate reduction by the end of the year.

Most economists don’t see board members waiting long before taking a knife to the rate again.

“The RBA is waiting to see the impact of its June and July rate cuts and the federal government’s tax cuts for low and middle income earners, and in particular it wants to see lower unemployment,” AMP chief economist Shane Oliver said.

“We doubt that the policy easing seen so far will be enough to get unemployment below 4.5 per cent and wages growth and inflation up to target, and so expect the RBA to resume cutting later this year.”

With unemployment having remained steady at 5.2 per cent in June, that view is widely shared among economists.

Futures market pricing suggests a cut at today’s meeting is off the table but another 0.25 percentage point cut is certain by November at the latest, a timeline that chimes with most economist expectations.

The opinion stems at least in part from RBA governor Philip Lowe’s language when the bank delivered the second of its two consecutive 0.25 percentage point cuts in July.

Dr Lowe signalled the RBA would adjust rates again “if needed”, which was widely interpreted as the central bank adopting a watching brief after it shifted the rate from nearly three years at 1.5 per cent.

Dr Oliver expects the RBA to next cut in November and again in February, while Westpac’s Bill Evans agrees on February but is tipping October for the first move. Mr Evans said he would be particularly interested to see whether Dr Lowe’s statement on the rate decision, which as always will be released at 1430 Sydney time on the first Tuesday of the month, persists with the “if needed” qualification.

“We favour that term still being used implying that, at least at the time of the meeting, the board expects to hold fire in September,” Mr Evans said.