Economists Urge RBA for Aggressive Rate Cuts to Stimulate Economy
In a recent appeal, leading economists have urged the Reserve Bank of Australia (RBA) to consider a significant reduction in the cash rate at their forthcoming meeting in July. The call comes in light of sluggish economic growth and persistent consumer caution, which have hindered a robust recovery in the private sector.
Warren Hogan, managing director at EQ, advocates for an "uncharacteristic" cut of 35 basis points, larger than the standard 25 basis points reductions observed earlier this year. In his opinion piece in the Australian Financial Review, Hogan states that the current neutral cash rate believed to be around 3.5% demands immediate action. He highlighted that this sizeable cut could alleviate financial strain on Australian households, particularly benefiting the average homeowner with a $600,000 loan, who could see their monthly repayments decrease by $128.
Stephen Koukoulas, another prominent economist and contributor to Yahoo Finance, echoed Hogan’s sentiments. He suggests that a more aggressive cut of 50 basis points is necessary to realign the cash rate to a neutral position, estimated to be in the low 3% range. Koukoulas warns that delaying these rate cuts could spell trouble for the economy in the coming years, predicting intensified financial challenges around 2026 if corrective measures aren’t takes soon.
The Australian economy grew only 0.2% in the March quarter, with an annual growth rate of just 1.3%. This sluggish performance has led to a propelling of household saving rates, which rose above 5%—a rate reminiscent of pre-pandemic norms. This increase in savings reflects a shift in consumer behaviour, with many preferring to save rather than spend, even in the face of rising disposable incomes.
Economists are concerned about businesses slowing down capital investments and facing profit squeezes from increased costs, with many unable to pass these costs onto consumers. Hogan cautions that if businesses do not adapt—either by increasing prices, which could spur inflation, or continuing to absorb costs—many may face significant operational challenges, risking an entrenched economic stagnation akin to the crisis experienced in Japan in the early 21st century.
Looking forward, financial markets anticipate further adjustments, with projections of three additional 25 basis point cuts by the end of 2025, potentially lowering the cash rate to 3.10%.
With clear indications of a fragile economic landscape, the spotlight remains on the RBA to respond decisively in July, balancing the need for economic stimulation against inflationary pressures.
