RBA has lending rates ‘where they want them’: economist

The possibility of eight rate hikes in two years is “highly unlikely”, but a cash rate cut could be on the cards, according to a leading economist.

Former Reserve Bank of Australia (RBA) member, John Edwards last week predicted the RBA will introduce eight rate hikes of 25 basis points each over the next two years to bring the official rate to 3.5 per cent. However, industry experts have questioned the likelihood of this occurring.

Richard Robinson, principal economic forecaster at BIS Oxford Economics has pointed to weak inflation, a downturn in residential construction and in mining as factors counting against a series of rate hikes.

He commented: “There’s certainly not a compelling case to raise rates, and certainly not eight times in two years.”

Arguing that undue focus was placed on the cash rate, he suggested more focus be placed on the lending rate by the industry. He explained: “Given the margin [between the standard lender variable rate and the RBA cash rate] has gone from 1.8 per cent… in the mid '90s to the mid 2000s and now it’s blown out to a 3.75 per cent margin, the RBA doesn’t have to do much; they’ve got lending rates where they want them.”

In fact, should banks move to widen margins further to recover some of the profit lost through the bank levy, the RBA “may have to cut rates to keep lending rates where they are,” he added. However, the chances of a cut are reasonably slim, he said, sitting at around 20 per cent.

Stephen Koukoulas, managing director at Market Economics said in June next year the official cash rate could be sitting at 0.75 per cent and that he suspects the RBA will shift the rate downwards around September or October of this year. He attributes this to a “tapering” housing market and subdued consumer spending.

“It looks as though the economy has continued to be subdued, inflation certainly… will continue to be well contained and they'll probably deliver a rate cut at the end of the year that they should have delivered 18 months ago or so,” he commented.

Mr Koukoulas added that Mr Edwards’ hypothesis was based on the likelihood of a “very, very strong” economy, however according to Mr Koukoulas, the Australian economy will not experience the rates of growth predicted.

The RBA will announce the official cash rate for July at 2pm today.

[Related: RBA hikes could push mortgage rates to 7 per cent]

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Lucy Dean

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