Low rates here to stay

Economists are still tipping two cuts this year, writes

Anthony Keane

INTEREST rates are expected to stay at record lows for at least another year as new challenges create financial uncertainty.

Ahead of the Reserve Bank of Australia’s first board meeting for 2020 tomorrow, economists believe it will keep its official cash rate on hold but have pencilled in two more rate cuts by the end of the year.

That means more ultra-low mortgage rates for homebuyers – many below 3 per cent– and more frustration for savers earning next to nothing on their cash in the bank.

Most savings accounts today pay less than 2 per cent.

The coronavirus outbreak and this summer’s bushfire disasters are likely to dent economic growth, but not enough to force the RBA to cut its official cash rate tomorrow.

The rate stands at 0.75 per cent, and solid inflation and jobs data in the past two weeks make it almost certain that the RBA won’t cut immediately.

Financial markets price the chance of a cut this week at less than 20 per cent.

Betashares chief economist David Bassanese said “surprisingly strong” labour market figures had given the RBA breathing space before cutting again.

“There’s been a few morsels of strength in the data and it means they can adopt a wait-and-see approach,” he said. “I still think the data will weaken further.” Mr Bassanese said the bushfires were negative for consumer sentiment

“and the coronavirus probably has a few months to play out”.

“In the best-case scenario I think global markets will be on the back foot.”

Mr Bassanese said he still expected two 0.25 percentage point rate cuts by the end of 2020. “I think this time next year the cash rate will be at 0.25 per cent but the RBA may well have a tightening (rate-rising) bias,” he said.

Last week’s headline annual inflation figure was 1.8 per cent, while underlying inflation – which strips out volatile food and energy prices – was 1.6 per cent, still well below the RBA’S target band of 2-3 per cent.

Australian Bureau of Statistics chief economist Bruce

Hockman said drought conditions had impacted food prices, while housing-related expenses such as utilities and new homes fell in price.

Commsec senior economist Ryan Felsman said the RBA was not expecting a rise in inflation any time soon and it had forecast 2 per cent by the end of 2021.

“They expect inflation to remain firmly entrenched below their 2-3 per cent target,” he said.

Interest rate cuts are designed to lift inflation by prompting people to borrow and spend, but this hasn’t happened for several years amid anaemic wages growth in Australia.

Mr Felsman said Commsec was forecasting an interest-rate cut in April, and possibly

August.

“But it’s questionable whether cutting rates further is going to stimulate the economy as far as consumer spending is concerned,” he said.

Mr Felsman said the impact of the current “hysteria around coronavirus” would depend on how long it took to stop its spread. But weaker economic growth in China – Australia’s biggest trading partner – would impact our economy.

“A lot can happen in the next year,” he said.