NAB says RBA may cut interest rates to near zero

author-avatar By on September 12,2019
NAB says RBA may cut interest rates to near zero

Photo by Melissa Walker Horn on Unsplash

NAB economists have changed their mind on the Reserve Bank outlook and now believe the RBA could cut the cash rate to as low as 0.25% by mid-2020 unless there is “meaningful stimulus”.

The Reserve Bank may be forced to cut the official cash rate to 0.25% by mid-2020 “unless the government delivers a meaningful fiscal stimulus” after ABS figures revealed the worst economic growth since the GFC, warns NAB chief economist Alan Oster.

The bank, who had previously tipped the RBA to cut to a new record low of 0.75% in November, has updated their forecast to include an additional rate cut to 0.5% in February, at which point the central bank has signalled plans for “unconventional monetary policy measures”.

But the RBA recently told a parliamentary committee that resorting to unconventional measures like quantitative easing remains “unlikely” at this stage.

“While at this point it is unlikely the Reserve Bank will need to employ unconventional monetary measures, the Reserve Bank Board considered it prudent to understand the issues involved.

“At a cash rate of 1%, the Reserve Bank Board still has scope for conventional policy easing. While unlikely at the current juncture, if circumstances were to warrant it, the Board would consider unconventional monetary policy options,” the RBA noted on Wednesday in a written response to a question on notice last month from Liberal MP Tim Wilson.

Mr Oster said the bank had revised its outlook because economic growth is falling short of RBA forecasts and unemployment is likely to rise.

“The forecast of lower interest rates reflects increased downside risks to the domestic economy and greater uncertainty about the world economy. Growth continues to undershoot the Reserve Bank’s forecasts, such that unemployment is likely to edge higher, with inflation stuck below the 2-3% target band.”

He said the recent tax cuts were doing little to encourage households to spend.

“Our internal data suggests that rate cuts and tax refunds have done little to boost consumer spending in July and August as was hoped.

It’s likely too early for the effects of the tax cuts to flow through to the economy. Treasurer Josh Frydenberg has said the tax relief will start showing up in the September quarter. Mr Frydenberg has also said there will be no further economic stimulus until next year’s May budget.

Mr Oster said if there is no help from the government, the RBA would have little choice but to cut the cash rate further.

“We continue to see the need for additional fiscal stimulus, through new infrastructure investment, cash hand-outs and/or the pull-forward of tax cuts. Governor Lowe has repeatedly called for more help from fiscal policy, although to date the government is focused on the political objective of returning the budget to surplus.

“Unless something meaningful is done on fiscal stimulus, we think the Reserve Bank could cut the cash rate further to 0.25% by mid-2020, simultaneously undertaking unconventional monetary policy.”

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Emma joined as a Finance Journalist in 2019. She is a journalist with more than five years experience across print, broadcast and digital media, with previous stints at Style Magazines, 4ZZZ radio, and as editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of young women and millennials by writing about complex financial topics in a way that's easy for the average Joe (or Jill) to understand. When she's not writing about finance she's watching Greys Anatomy (again).


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