Insight: RBA May Be Open to Three Cash Rate Cuts This Year

By Sophia Rodrigues

From a reluctant rate-cutter, the Reserve Bank of Australia might be making an about-turn this year and consider as many as three rate cuts to take the cash rate to 0.75% before the end of 2019.

The RBA may also be open to the possibility of taking the cash rate still lower next year.

Such an outcome would be in line with JP Morgan’s Sally Auld who expects the cash rate to go down to 0.5% by the middle of next year. It would also be consistent with forecast by Westpac’s chief economist Bill Evans who last week said he expects the cash rate to go down to 0.75% by November.

If the RBA indeed lowers the cash rate by 75bps this year, it would be the first time since 2012 the cash rate would go down by more than 50bps. In 2012, the RBA cut the cash rate by a total 125bps.

The cash rate is currently at 1.5%, and it is expected to be cut to 1.25% next week. The other two cuts could come in August and November.

The RBA’s change of heart to such a level of dovishness is being guided by two main factors:

--Spare capacity in the economy is far more than the RBA previously assessed. This means the unemployment rate needs to go lower to have inflation consistent with the target band.

--Financial stability concerns have receded, and it may not re-emerge to an extent where it would be a concern again.