RBA could cut rates twice more in 2016, CommBank predicts

Adam Smith 13 May 2016

reserve bank of australia signThe Reserve Bank could make two additional rate cuts before the year’s end, according to one major bank.

Commonwealth Bank chief economist Michael Blythe has added to the bank’s previous forecast for a rate cut in August, saying the bank expects the RBA to make an additional cut to the official cash rate.

“We had pencilled in another 25 basis point rate cut for August, but the level of RBA concern is such that we feel obliged to add another cut to our cash rate profile. We have inserted a further 25 basis point cut in November,” Blythe wrote in a note to investors.

This would bring the official cash rate to what Blythe called “an extraordinary low” of 1.25%.

The Reserve Bank could be prompted to move by an extended period of inflation falling below the 2-3% target band, Blythe indicated. This anticipated extended period of low inflation could intensify debate over whether the RBA’s inflation target should be lowered, Blythe said.

“For the record, we think a change is unlikely,” he said.

Blythe also warned that rate cuts could be issued sooner than expected.

The warning comes after former RBA head Bernie Fraser criticised the Central Bank’s decision to cut the cash rate. Fraser argued that government action rather than monetary policy was necessary to stimulate the economy.

CommBank was amongst the many banks who cut rates following the RBA's May rate cut.

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