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RBA’s reluctance won’t stop another rate cut


RBA cash rate march 2016The Reserve Bank was reluctant to cut the official cash rate at its last meeting, but economists are still tipping another cut before the year’s end.

Minutes from the Reserve Bank’s May meeting indicate the RBA board’s decision to trim the official cash rate to 1.75% may have been a close call. The minutes show the board considered waiting for more data before deciding on a rate cut.

“Members discussed the merits of adjusting policy at this meeting or awaiting further information before acting. On balance, members were persuaded that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting,” the minutes said.

The board noted that unemployment remained stable and GDP growth had been “a bit stronger than expected”, but suggested that low inflation tipped the board’s balance toward a rate cut.

In spite of the apparent reluctance to deal a May rate cut, economists are still predicting the official cash rate has yet to reach the bottom of the cycle. Westpac chief economist Bill Evans has forecast another cut, but has said the Bank will wait for new inflation data.

“With reasonable prospects for ongoing above-trend growth we expect that the Bank will be satisfied that its next rate cut in August will provide further support for its current forecast that underlying inflation will be back near the bottom of the target zone in 2017,” Evans said.

What are the chances of two RBA cuts in a row?

Commonwealth Bank economist Michael Blythe believes the RBA will cut the official cash rate twice before the end of the year, but has claimed the rate cuts are unnecessary.

"The real economy I don't think really needs any extra assistance right now. I think what we're really saying here is, in the absence of anything else coming along to do some of the heavy lifting for policy, then what's left it's all down to interest rates,” Blythe said, according to the ABC.

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