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RBA leaves cash rate on hold as future economic performance uncertain

  • 100% of experts in finder.com.au RBA survey correctly predicted the cash rate would hold at 1.5%
  • Tough outlook for Australian economy, 58% of experts ‘concerned’ about coming 12 months
  • Time to consider other methods to promote economic growth

6 September, 2016, Sydney, Australia – The Reserve Bank has left the official cash rate on hold at a historic low of 1.5% this afternoon, amid concerns that rates are becoming ineffective at spurring growth, according to finder.com.au, Australia’s most visited comparison website.

Last month, the RBA slashed the interest rate by 0.25 percentage points but some argue the rate cut failed to combat the stubbornly high Aussie dollar and a strengthening housing market.

The prospect of further rate cuts are on the cards, as 47% of the 38 economists and experts surveyed are predicting another drop by 2017 – yet some are questioning whether additional stimulus measures are needed.

Graham Cooke, Insights Manager at finder.com.au, says Australian experts and economists are growing nervous about the future, with 58% of respondents in the finder.com.au Reserve Bank Survey concerned about the economy over the next 12 months.

“We haven’t yet seen much reaction to last month’s cut, with a number of experts beginning to question the tool’s efficacy as it gets closer to zero,” he says.

“The RBA’s adjustment of the interest rate is mainly effective at curtailing high inflation, and has shown ineffectiveness at spurring inflation. We are lucky in Australia that we still have room to cut – but the Government may need to look at alternative methods.”

Lynne Jordan of Liberty agrees. “As we’ve seen in overseas markets, in particular Japan, Europe and the US, monetary stimulus hasn’t produced the desired result. This suggests not only is the RBA going to have to push interest rates to even lower record levels, but there will be an increasing need for the Government to use other measures such as fiscal stimulation if they are going to succeed in their objectives,” she says.

However the vast majority of experts believe it would be a bad idea if Australia launched quantitative easing – the introduction of new money into the money supply.

“Eighty-one per cent of experts had an aversion to Australia jumping on the quantitative easing bandwagon,” Mr Cooke says.

The quantitative easing strategy has been used in nations like the U.S to promote economic growth and inflation. Only five experts (19%) believe quantitative easing should be considered in Australia.

“An anticipated rate hike by the US Federal Reserve in the United States is likely to have a bigger impact on the Australian dollar than further rate cuts here in the short term,” he says.

Mr Cooke says the panel did not believe the RBA was influenced by the trend of Australia’s big banks not passing on the full rate cut to their variable home loan customers.

“Only 14% of experts thought the RBA would be less likely to make cuts if the banks fail to pass on the full rate reduction,” he says.

Experts were divided about whether now was a good time to lock in a fixed-rate home loan. When asked if they would advise a friend that now is a good time to lock in a rate, 59% says they would recommend a fixed rate, while 41% are against fixing in anticipation of more rate cuts to come.

Thirty-nine per cent of economists are expecting the rate to bottom-out at 1.25%, with one in five predicting 1.00% and one in 10 expecting it to fall even further.

Here’s what our experts had to say:

Jordan Eliseo, ABC Bullion: "The RBA will be happy to sit tight after their recent move, though we still see rates heading much lower in this cycle. CAPEX, inflation, wage growth etc are all still soft, and the AUD is still stubbornly sitting above USD $0.75. Headline GDP growth rates are reasonable, but we still expect the RBA to look through that and cut later in this year."

Shane Oliver, AMP Capital: "It’s too soon since the last move in August and not much has changed since than to justify a move."

Garry Shilson-Josling, Australian Associated Press: "The RBA prefers to link its cash rate moves to quarterly CPI releases and the next is not until late October."

Darryl Gobbett, Baillieu Holst Ltd: "Bias is to cut further with the Aussie dollar still higher than wanted and outlook for continued private sector deflation but RBA wishes to retain some flexibility. Expect cash rate to be cut in November to 1.25%."

Peter Munckton, Bank of Queensland: "The RBA has the cash rate at the right level."

Richard Robinson, BIS Shrapnel: "Economic growth and the unemployment rate are reasonable at present. The last rate cut failed on three grounds - firstly, the exchange rate was unaffected (and it is our view that the RBA was seeking to engineer a depreciation) and secondly, the housing market saw an increase in sales activity and prices (and the RBA had says it didn't think there was a risk of this happening) and thirdly, only half of the cut was passed on by the commercial banks. The RBA should keep their powder dry for when the economy weakens in 1-2 years time or cut on the back of a rise in US rates to engineer a drop in the dollar."

Michael Blythe, CBA: "[The RBA are] waiting for next CPI."

Savanth Sebastian, CommSec: "RBA will want to see how the economy responds to the last two rate cuts in a post-election environment. Inflation outcomes will be key to next move on rates."

John Hewson, ANU: "[The RBA are in] wait and see mode."

Scott Morgan, Greater Bank: "The RBA is currently focussed on what the Australian dollar is doing what the US will do with rates. With the fairly dollar stable and talk of US rate increases, I think they will ‘wait and see’ this month."

Mark Brimble , Griffith University: "They will take time to consider their options and explore alternatives as they wait to determine the impact of the previous rate cut (if any)."

Peter Haller, Heritage Bank: "The RBA will wait to see what impact the August rate cut has on inflation and the economy more generally."

Alex Joiner, IFM Investors: "No catalyst for a further move in terms of the data flow or deterioration of the outlook."

Robert Montgomery, Infrastructure Partnerships Australia: "The RBA will hold rates at 1.5% after last month’s cut and wait to see how inflation responds. However, due to broader economic factors, monetary policy is unlikely to stimulate inflation in the near-term, meaning that the RBA will be cautious about further rate cuts in the near future."

Michael Witts, ING Bank: "The RBA has done sufficient for the immediate term, much will depend on the US Fed and how the AUD responds."

Leanne Pilkington, Laing+Simmons: "The cash rate is already low and any impacts from the recent cut have yet to really be felt in a housing market sense."

Nicholas Gruen, Lateral Economics: "Because they are flying by the seat of their pants, and given the recent cut they won't want to do it again too soon."

Lynne Jordan, Liberty: "There’s still no doubt another rate cut is on the cards. Completed construction levels dropped sharply in the last quarter, jobs and unemployment are showing no improvement since March and wage growth is expected to remain subdued for some time. However, rumours of a rate hike in the US are expected to apply downward pressure on the Australian dollar, meaning the Reserve Bank’s timeline for an additional rate cut could be pushed back to early next year. The urgency of any rate cut will no doubt take into consideration the impact of Government efforts to return the economy to benchmark GDP growth whilst also fighting deflation. As we’ve seen in overseas markets, in particular Japan, Europe and the US, monetary stimulus hasn’t produced the desired result. That suggests not only is the RBA going to have to push interest rates to even lower record levels, but there will be an increasing need for the government to use other measures such as fiscal stimulation if they are going to succeed in their objectives."

Grant Harrod, LJ Hooker: "Concerns another decrease could drive house prices up further."

Stephen Koukoulas, Market Economics: "RBA maintains a hint of optimism about the outlook - no need, at this stage, for more monetary policy stimulus."

Michael Yardney, Metropole Property Strategists: "Having cut rates last month the RBA will now wait and see the effect of these cuts. The strong property markets, especially in Sydney and Melbourne, are likely to make the RBA wary of further cuts at present."

Mark Crosby, Monash Business School: "With the Fed [Federal Reserve] considering raising there is no reason for the RBA to cut given recent cuts to the cash rate haven't had time to feed through to inflation."

Emily Dabbs, Moody's Analytics: "Weak inflation data prompted easing earlier in the year, and the central bank will likely wait until the next data point before easing policy further."

Jessica Darnbrough, Mortgage Choice: "Given that the Reserve Bank cut the cash rate last month, I think they will take a wait and see approach in September. The RBA will be keen to see what impact last month's rate cut will have on the property market as well as the broader economy before making any further adjustments to the current monetary policy setting."

Saul Eslake, Economist: "RBA cut the cash rate at its last meeting, and will want time to evaluate the effects of that move before considering any further change - in the absence of any significant change in the economic environment."

Alan Oster, NAB: "It’s too early to see results of last month's cut."

Jonathan Chancellor, Property Observer: "Often the RBA cut in quick succession but not this time as with rates at such lows they are unlikely to have the desired outcome. They must be worried too about the Sydney property market resurgence."

Matthew Peter, QIC: "Having cut in August, the RBA will await further data on growth and inflation and for signals from the US Fed on their next rate hike, before considering whether to end the current easing cycle."

Noel Whittaker, QUT: "It’s too soon to change after last month."

Angus Raine, Raine & Horne: "The time of year will most probably drop before christmas."

Christine Williams, Smarter Property Investing: "In my opinion the rate will stay on hold due to last month's decrease together with the decrease of unemployment rate and coming into spring where historically the unemployment rate continues to reduce with seasonal employment in the retail, food and construction industries."

Janu Chan, St.George Bank: "The RBA will take their time in assessing the impact of recent rate cuts in August and May."

Steven Milch, Suncorp: "No pressing case for a move so soon after the August cut."

Brian Parker, Sunsuper: "No material change in the RBAs growth or inflation outlook since last time, and current level of rates isn't holding anyone back!"

Scott Haslem, UBS: "We believe now accommodative policy at a 1.5% cash rate, firm growth data, a likely trend lower in the AUD and concern about financial stability will see the RBA on-hold at 1.5% for the foreseeable future. While inflation will remain low, core inflation is likely to drift modestly higher from here."

Nicki Hutley, Urbis: "Data is showing growth and employment remain moderately healthy. RBA [will be] reluctant to cut further so will wait for next CPI number to see if there is cause to cut again."

1Experian Hitwise 2015

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Disclaimer

The information in this release is accurate as of the date published, but rates, fees and other product features may have changed. Please see updated product information on finder.com.au's review pages for the current correct values.

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