Economists tip rate cut
Growth to spark intervention from RBA
EFFORTS to stimulate the economy unveiled in the Federal Budget will not be enough to stop the Reserve Bank from cutting interest rates to a new record low, economists have warned.
UBS Australia chief economist George Tharenou said budget measures to stimulate the economy, ranging from promised tax cuts, one-off payment and sweeteners for small business, were smaller than expected.
Mr Tharenou said the budget reinforced his view that economic growth would slow sharply to 1.9 per cent this year, sparking intervention from the RBA.
“The lack of material stimulus raises the risk of earlier and larger cuts,” he said. “We expect the RBA to shift to an easing bias in May, before cutting rates … in both July and August, but the lack of material stimulus raises the risk of earlier and larger cuts.”
Growing numbers of economists expect the RBA to cut the official cash rate this year following a sharp slowdown in economic growth in the second half of last year.
The RBA shifted its interest rate outlook from the next move being up to the chances of a rise of cut now being evenly balanced earlier this year.
AMP Capital chief economist Shane Oliver said while the budget should provide a boost to household finances and confidence, UBS Australia chief economist George Tharenou said budget measures to stimulate the economy were smaller than expected it would be “relatively modest”.
“While it will help the economy, it’s not enough to change our view that the RBA will cut interest rates twice by year end,” he said.
Dr Oliver said the economic assumptions in the budget were a “little bit on the optimistic side”. The Government had taken a cautious approach around its forecast prices for key commodities such as iron ore but its outlook for wage growth and unemployment was too rosy, he said.
“A big risk remains that wages don’t accelerate as assumed leading to a resumption of poor personal tax collections,” he said.
The Reserve Bank left the cash rate on hold at 1.5 per cent on Tuesday.