Tuesday, August 2, 2016

RBA tipped to cut rates to new low but urged to keep rates powder dry

It's shaping up as a tight call but most economists think the Reserve Bank will cut interest rates to a new historic low this afternoon.

The majority of economists polled by Bloomberg are tipping a 0.25 percentage point cut to 1.5 percent as the RBA fights back against an outlook for slowing inflation.

If the RBA delivers on expectations, it will have cut the cash rate by 3.25 percentage points since November 2011.

But while money markets see a 70 percent chance of a rate cut at 2.30pm AEST, one economist is urging the RBA to keep its rates ammunition on hold to deal with potentially harder economic times ahead including a recession.

Annette Beacher, head of Asia Pacific Research at TD Securities in Singapore says now is not the time for the RBA to cut rates to deal with low inflation.

"While there is certainly a raft of expectations for the RBA to cut, we don't see any data or any situation in recent weeks and months to tip them over the line," Ms Beacher  told ABC News.

"Australia hasn't had a recession since 1991 and I do think the RBA would quietly like to keep some powder dry in case there is a real crisis.

"I think leaving a 1.75 percent cash rate in the bank might be sufficient powder for whatever occurs around the corner."

The Reserve Bank last cut the cash rate in May on fears about deflation, overshadowing the Federal Budget, in what was also seen as a close decision.

The Australian Bureau of Statistics released more evidence of soft inflation on July 27 with headline inflation up 0.4 percent in the June quarter and one percent over the year.

While headline inflation is well below the RBA's target band of 2 to 3 percent over time, the RBA watches core inflation with the trimmed mean measure rising to 1.7 percent over the year.

The RBA is also concerned about the rising Australia dollar which it has described as a “complication” in previous statements.

While it is lower today at 75.3 US cents ahead of the RBA meeting, it has been above 76 US cents after soft economic growth data in the US late last week and the reduced likelihood of a US rate rise this year.

Today's meeting is the second last for RBA governor Glenn Stevens who will chair his final rates decision in September before leaving the RBA on September 17.

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