Capital Economics has joined other major investment houses in deciding it believes the RBA is likely to cut the official cash rate to 1.75% next Tuesday.
There are a host of takes from economists here following this game-changing piece of data, but CE has the following dead-right summary of the handbrakes for the RBA board:
There are three plausible reasons why the RBA could ignore the plunge in underlying inflation and leave rates on hold at 2.0% at next week’s meeting, or perhaps even beyond. First, the Bank could continue to interpret low inflation as giving it the scope to cut rates in the future if demand falters. Second, lingering concerns about financial stability and the health of the housing market may mean the RBA is reluctant to cut rates again. Third, the RBA may want to wait to see what is announced in the Federal Budget, which will be released just five hours after the RBA’s decision.
The view that cutting interest rates might do more harm than good is starting to gain traction among many commentators. And senior people in central banks don’t work in an ideas vacuum.
Cutting rates again would send a very blunt signal that there are concerns about the health of the economy — not helpful when property prices in pockets of Australia are now starting to reverse as investment fever takes a reality check.
Then there’s the budget. Maybe Scott Morrison has something that will stir demand in store.
