Pressure to cut interest rates continues to build

Cut interest rates Reserve Bank of Australia RBA
The RBA has kept the official cash rate on hold at 1.5% for the 29th consecutive month.

Pressure is building on Australia’s Reserve Bank to cut official interest rates as early as its April meeting to deal with the slowing economy, correcting property market and very low inflation.

While the RBA will likely sit on the current 1.5% rate until there is clearer evidence that the job market is suffering given the latest 4.9% unemployment rate, there are no shortage of pundits and players still urging the RBA to cut rates when the board meets on 2 April.

Investment bank UBS has been one of the more strident, calling for a 50-basis point cut to 1% on 2 April, accompanied by a statement that it was willing to cut further if required.

That call followed the weak economic growth figures in the three months to December and evidence that the growth slump has continued into 2019.

RBA needs to act now

UBS chief economist George Tharenou said such a bold move would engender confidence and show markets that the RBA was serious about supporting growth.

It would also have the added benefit of forcing the Australian dollar lower, boosting Australia’s export sector.

He has also said that the Reserve Bank should consider some more extreme and unconventional actions such as quantitative easing to ensure that the economy kept growing.

Different forms of quantitative easing were used by central banks in the US, Japan and Europe in the response to the GFC after interest rates became so low that the banks found other ways to effectively print money and cut the cost of credit to stimulate the economy.

Quantitative easing needed as well?

Mr Tharenou pointed out that the current RBA governor, Dr Philip Lowe, said that such unconventional measures could be considered once rates fall to around 1% when he was an assistant governor.

Mr Tharenou also pointed to the continuing fall in property prices as further restricting consumer spending, as households saw their wealth contracting and become increasingly wary of spending on non-essential items.

Other economists have said that there is little prospect of falling interest rates feeding new life into deflating house prices or reigniting inflation, reducing the risks of the RBA acting to cut rates to support the economy.

However, lower rates would ease pressure on businesses and households paying back large amounts of debt and allow them to pay down debt further and spend more money.

Federal budget and election complicate picture

Another complicating factor is that Treasurer Josh Frydenberg will release the federal budget on 2 April – the same day the RBA board releases its decision – with income tax cuts and other stimulus measures highly likely to be introduced.

While normally the RBA would take into account such fiscal stimulus coming into the economy, this time the fact that there will be a federal election straight after the budget and polls are showing that there is a high chance of a change of government mean that the shape and size of any fiscal stimulus is highly uncertain.

The fact that an incoming Labor government is also planning a raft of tax changes that could affect property and other markets such as negative gearing, capital gains and dividend franking changes also makes the outlook more uncertain than usual.

However, there has been little sign that the RBA is seriously considering cutting official interest rates in the short term.

Minutes from the RBA 4 March decision showed that the board saw “significant uncertainties’’ in the Australian economy and was closely watching the evenly balanced positive and negative factors.

JP Morgan rate strategist Sally M Auld said the minutes suggested “the RBA is not rushing to any judgement that lower rates are required.’’

“But by early 3Q, we think signs of a modestly higher unemployment rate and further weakness in activity data will force the RBA’s hand,’’ she said.

Financial markets have already priced in one 0.25% interest rate cut this year.

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