Cash rate drops ahead of federal budget

The Reserve Bank of Australia (RBA) has announced that it has cut the official cash rate to a new record low of 1.25 per cent, following its monthly board meeting.

The sudden drop to the cash rate has come as a surprise to most industry pundits, with 35 of the 36 analysts on rate comparison website Finder.com.au’s panel predicting a hold verdict.

AMP Capital’s chief economist, Shane Oliver, was among the analyst that predicted a hold verdict but claimed that a rate cut would have been more appropriate in the current economic environment.

“While the threat to growth and inflation from the housing downturn (via reduced construction activity and negative wealth effects) is such that the RBA should cut interest rates in order to get in before unemployment starts rising, the most likely scenario is that they will continue to hold,” he said.

“The RBA probably needs to see more evidence that the slowdown seen in the second half last year is not just temporary, that consumer spending is under serious threat and that this will drive higher unemployment and lower for longer inflation.

“It will probably also want to see what sort of fiscal stimulus comes out of the budget and the federal election outcome.”

He added: “So rate cuts are probably still several months off.”

Stephen Koukoulas from Market Economics was the only panellist to correctly predict the rate cut.  

“The economy has slowed, with the per capita GDP recession in the second half of last year probably continuing into 2019,” he said.

“Inflation is low and, with the household sector under pressure from falling house prices, some policy stimulus is needed.”

However, CoreLogic’s head of research, Tim Lawless, was surprised by the timing of the cash rate cut.

“The decision to cut the cash rate came as a surprise, more from a timing perspective than the decision itself,” he said.

“There has been increasing acceptance that interest rates would move lower this year; however, market expectations put the timing for a rate cut post-August. 

“The early move implies the RBA has become increasingly concerned that forecasts on economic growth and inflation would undershoot as the economy loses momentum; today’s rate cut is a preemptive strike in an effort to revitalise economic growth.”

The RBA’s cash rate announcement comes ahead of this evening’s release of the Coalition government’s budget for the 2019-2020 fiscal year.

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[Related: RBA confident in borrower resilience]