Low rates here to stay

Econ­o­mists are still tipping two cuts this year, writes An­thony Keane

Central and North Burnett Times - - MONEY -

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 Bass an es es aid the bush­fires were neg­a­tive for con­sumer sen­ti­ment “and the coro­n­avirus prob­a­bly has a few months to play out”. “In the best­case 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.

Co mm Sec 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.

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