The likelihood of an interest rate cut on Tuesday remains uncertain, despite record low inflation and wages growth making this week’s RBA board meeting a live one.
Economists are split over the benefits of further rate cuts. The chief economist of the Commonwealth Bank, Michael Blythe, warned they could harm the economy.
“Rate cuts now potentially have a negative impact on household sentiment,” he said. “People understand that you’re cutting interest rates from record lows only if something’s going wrong in the economy.”
But he predicted rates would still be cut this week.
On Monday the treasurer, Scott Morrison, said the Reserve Bank was facing a genuinely challenging time as its long-standing governor, Glenn Stevens, prepared to step down next month.
Stevens will hand the reins to his deputy, Philip Lowe, in September after leading the bank through the turmoil of the financial crisis years, the Greek debt crisis, the peak in mining investment, and the subsequent fall in inflation.
Stevens cut the official cash rate to a record low of 1.75% in May, and many economists think he will have to cut rates again this week after headline inflation hit an anaemic 1% last week, the slowest rate since 1999.
But some said there was no need for further cuts because the RBA’s forecasts for growth and inflation had not materially changed since its board met in July.
The Australian National University’s so-called “shadow board” – made up of nine market and academic economists, including former RBA board member Warwick McKibbin – believes the board should keep rates on hold.
One of its members, Prof Bob Gregory, said the economy should have come to the end of its rate cut cycle, unless something “really dramatic” happened.
Morrison acknowledged on Monday that economic conditions were difficult.
“We’re in an environment at the moment where we’ve got low inflation, low interest rates, low wages growth, and low levels of business investment, and this is a really big challenge for the country,” he said.
“That’s ... not true [just] in Australia. It’s true all around the world. The United States didn’t [lift] their rates, and that was based on the fact that they have very similar [conditions]. Their growth rate was just over 1% for the year to June.”
He said the RBA would also be aware of the different housing markets across the country – many have an oversupply of apartments.
The shadow assistant treasurer, Andrew Leigh, said many key numbers in the economy had been going backwards for years, with living standards falling, home ownership at 60-year lows, and wage growth at its slowest in 30 years.
“Given that former treasurer [Joe] Hockey described a rate 1% above our current rate as being ‘emergency’ levels, then who knows how best to describe this rate,” Leigh said.
