RBA Faces Pressure for Interest Rate Cuts Amid Weak GDP Performance
Recent economic data has led to speculation that the Reserve Bank of Australia (RBA) may need to implement back-to-back interest rate cuts in July. The Australian economy showed a disappointing growth rate of just 0.2 per cent in the March quarter, a decline from 0.6 per cent in the December quarter, as reported by the Australian Bureau of Statistics (ABS).
The latest national accounts indicate that annual economic activity has risen by only 1.3 per cent year-on-year, which is significantly lower than the RBA’s projection of 1.8 per cent growth by the June quarter. Compounding the issue, GDP per capita has dropped by 0.2 per cent over the quarter and 0.4 per cent annually, raising alarm among economists.
In light of this "gloomy" outlook, some economists have revised their forecasts, now anticipating that the RBA may decide on an additional interest rate reduction sooner than initially expected. AMP’s deputy chief economist, Diana Mousina, has adjusted her forecast to include a cut of 0.25 per cent in July, in addition to previously expected cuts in August, November, and February.
The prevailing cash rate could potentially settle at around 2.85 per cent at the end of this easing cycle, according to Mousina. Stephen Wu, a senior economist at the Commonwealth Bank, emphasised that while the base case remains for a 0.25 per cent cut in August, the latest labour market and inflation data may influence the RBA’s decision-making in July.
Market expectations for a July cut have increased, as the minutes from the RBA’s May Board meeting did not significantly counter this trend. Oxford Economics Australia’s lead economist, Ben Udy, pointed out that ongoing indicators of economic weakness would likely prompt the RBA to act sooner than anticipated.
Other economists weighed in on the situation. Ben Udy of Oxford Economics and Alex Joiner from IFM both highlighted the likelihood of an earlier move to cut interest rates, especially given the current economic indicators. Meanwhile, Goldman Sachs Australia’s chief economist, Andrew Boak, has posited that the RBA may implement up to three more rate cuts this year, with potential reductions aimed to bring the terminal rate to approximately 3.1 per cent.
Notably, during the RBA’s last meeting in May, Governor Michele Bullock noted the board considered a more substantial cut of 0.50 per cent but ultimately decided on a 0.25 per cent reduction. Economist Stephen Koukoulas has argued for a more aggressive approach, asserting that a larger cut is necessary to stimulate the economy’s recovery.
“Given the paltry 0.2 per cent growth, a 50 basis point cut in July is essential,” Koukoulas stated. He warned that delaying adjustments to the cash rate would negatively impact economic performance further. Current estimates suggest a neutral cash rate should be in the low 3 per cent range, while the current rate stands at 3.85 per cent.
An additional cut of 0.25 per cent would equate to a reduction of approximately $90 from the average borrower’s repayments on a $600,000 loan with 25 years left. The RBA’s next monetary policy meeting is scheduled for July 7 and 8, where these considerations will be further discussed.
As the economic landscape evolves, the coming weeks may prove critical for the RBA and the broader Australian economy, with market participants keenly observing any shifts in the interest rate landscape.
