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Economic Outlook

The Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points to an all-time low of 1.25% in June, the first change in the cash rate in over two years. RBA Governor Phillip Lowe has indicated that further rate cuts are likely to stimulate domestic employment in a continuing low inflation environment. The RBA meets again next week. Markets are currently expecting official interest rates to fall below 1.0%, and some economists are suggesting the central bank will also undertake some form of quantitative easing to prevent a recession.

Domestic activity remains very subdued, with the housing sector still in the doldrums and retail trade stagnant. Globally, there are downside risks to the global economic outlook as trade concerns between the US and China intensify. However, the US is experiencing solid economic growth with strong wages growth resulting from very low levels of unemployment. As a consequence, official interest rates in the US have continued to rise and are now notably higher than Australia at 2.25%-2.5% which has placed ongoing pressure on the Australian dollar as international investors seek out higher yields.

Official Interest Rates, US and Australia (%)

Notes: The neutral interest rate line shows the upper boundary of the RBA’s estimate of the neutral interest rate band.

Sources: RBA (2019a), RBA (2017), IFM Investors (2017).

The RBA has indicated that it will be closely monitoring Australian labour market conditions in setting interest rates, with an implied target for the unemployment rate of 4.5%-5.0% which is below the current rate of 5.1% and wages growth needing to improve for inflation to increase from current levels to be within the target range of 2%-3%.

Considering the balance of recent economic data and forward projections, it is reasonable to conclude there remains spare capacity within the labour market and as such it is highly likely the next move from the RBA will be a further rate cut. The RBA will next meet on 2 July 2019. Financial markets are anticipating up to 2 more 25 basis point rate cuts by the end of the year. Combined with the mooted regime of tax cuts by the Australian Government, this will provide part of the necessary stimulus to keep the economy from deteriorating further although additional action will likely be required.

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