It is likely that the Reserve Bank of Australia could reduce its official rates within the next month due to recent weakness in consumer price. Two experts agree that the central bank might not act quickly enough.
In a think piece in The Australian Financial Review, industry watchers John Kehoe and Matthew Cranston said the upcoming federal election is one case against the possible rate cut — the RBA would not want to get involved in a political conflict.
“A drop in interest rates would indicate to voters that the economy is not as strong as it appears.” Cranston and Kehoe indicated that the independent central banks could feel that a rate decrease is needed in May. But they will probably ignore politics to do what is best for the economy.
The RBA might also not reduce the official cash rate because of Australia’s employment situation. Australia’s unemployment levels are still at their lowest level in eight years. There has not been a significant increase in job intentions in Australia, suggesting that this trend is unlikely to continue.
“As long as the RBA can credibly predict an upward trend in wages, then there is no reason to lower rates. Cranston, Kehoe stated wages are currently increasing at 2.3%. This is not enough to keep pace with inflation.
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Because of the possibility of tax cuts, it is possible that the central bank will have to reconsider plans to reduce its rates. It is expected that consumption and inflation will be driven by income tax rebates for low- and medium-income households.
Kehoe stated economists believe that the income tax reductions will be worth 0.25 of a percent rate cut or 0.50 of a percentage point according Commonwealth Bank of Australia economists. Cranston agreed.
Cranston and Kehoe both suggested that the central bank may not be able cut rates quickly enough. RBA would need to push for the cut in order to avoid a recession in the future.
They stated that “the economy is not showing signs of stress and the cash rates have already fallen to a very low 1.5%. The RBA should therefore keep its interest rate ammunition in case there is a downturn.”
Although the RBA could reduce rates, they stated that this would only have a marginal positive effect on inflation and economic growth.
Rate cuts can take between nine and 18 months to fully impact the economy. They said that the RBA would need to review a second followup if rates are reduced once.
Cranston and Kehoe both believe that deflationary forces cannot exist in isolation. They are connected to external forces and can only controlled by the central banking.
“Disinflation is a worldwide problem. The automation of jobs and foreign workers are controlling wage and price inflation. These forces are out of the control the RBA,” they said.