In a speech delivered to the Australian Business Economists dinner last night, Reserve Bank Governor Glenn Stevens hinted that the central bank was maintaining a cautious outlook on further rate cuts. With the official cash rate currently at 4.25% and 3% hacked off since September, how low can the RBA go? Is a mooted emergency meeting in January now off the table?
Crikey asked a panel of leading economists for their views:
Michael Knox, Chief Economist and Director of Strategy at ABN AMRO Morgans: I think it’s very unlikely that the rate cut cycle has ended although it is very unlikely that RBA will cut again in January. The RBA has been ahead of the global curve from the beginning on rates and they will fall to around 3% in 2009. The only reason that we’re not in deep recession now is because of its pre-emptive action on interest rates. Australia is actually in the lucky situation of having a little bit of inflation.
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Josh Williamson, Senior Strategist TD Securities: We’re now looking at an eventual cash rate of 2.5% and think there could be more 75 or 50 basis point easings. Much more monetary stimulus is required to deal with the fallout from the financial crisis and we now need cash rates to go into uncharted territory — that would be very stimulatory and would help to improve consumer and business confidence. These are extraordinary times and they call for extraordinary measures. Although we don’t think there will be an emergency January meeting, we’ve seen the RBA respond very quickly in the past. If we see a further worsening in economic conditions we can’t rule out a January cut although the February meeting and upcoming activity data will help to provide a more robust assessment of the economy.
Adam Carr, Senior Economist, ICAP: I think the RBA will cut by another 50 basis points in February and that would take the official cash rate to 3.75% — this should provide ample stimulus to insulate against a global downturn. We really should be able to withstand a recession with rates that low, especially with the government’s fiscal stimulus package coming online. After February’s RBA meeting we should see more data that will indicate the impact of the stimulus and the Reserve will take this into account. The prospect for an emergency meeting in January is quite low — the RBA has already been very aggressive and it would take a material event on global markets to spark a January meeting.
Shane Oliver, AMP Capital Investors: I certainly don’t think that rate cuts have come to an end. When the Reserve Bank announced cuts in the past three months it consistently remarked that future cuts may be slower. There’s two main reasons that the RBA will cut further — although the cash rate is back to its previous cyclical low that was reached in 2001, mortgage rates today are around 6.8%, while back in December 2001 they were at 6.05%. So there’s further to go. The second reason is related to the economic crisis and the threat to the economy. China is slowing faster than it was earlier in the year and we’ve been hit by a run of economic bad news including rising unemployment and slumps in spending. This, combined with a decline in inflation, should result in more rate cuts. It’s unlikely the RBA will meet in January unless we’re hit with a significant global event.
Dr Ron Woods, The Econoclast: There has been more than enough cuts already and the Reserve Bank is basically flying by the seat of its pants. They have made significant mistakes both on the upside and on the downside. Investors should ignore whatever the Reserve Bank and market economists say because they’ve been making it up as they go along — earlier this year market economists were actually calling for rate rises. If there’s some economic rule that Glenn Stevens was following, that would be easier. The futures market suggests rates will hit 3.5% by March and this is more reliable than the views of market economists.