Political uncertainty could force RBA’s hand next month

Adam Smith 6 July 2016

percent handYesterday’s Reserve Bank cash rate hold may not mean that rates have hit the bottom of the cycle.

The RBA fell in line with expectations yesterday by keeping the official cash rate on hold at 1.75%. In its monetary policy statement, the Reserve said it would continue to “refine its assessment” on the outlook for growth and inflation and change course as needed. HIA chief economist Harley Dale said the statement showed the RBA could issue another rate cut this year.

“The key point from today’s Monetary Policy Decision is that the Reserve Bank of Australia is prepared to lower rates further in 2016 if they deem such action is required. Political uncertainty at home and abroad has increased the chance of a second cut to the [official cash rate] later in the year,” Dale said.

While the uncertain outcome of the Federal Election didn’t seem to weigh on the board’s mind, the RBA did mention political uncertainty caused by the UK Brexit referendum in its statement, but did not tip that the referendum factored heavily into its decision.

“Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern,” the RBA said.

But Dale argued that the possibility of a hung Parliament could weigh on consumers’ minds, and force the RBA’s hand in the months ahead.

“Looking ahead, the current political dynamic increases the prospect of a loss in confidence and economic activity in Australia in 2016/17. Hence the reason for the increased probability of a rate cut occurring over the August [to] December period.”

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