CBA: Second rate cut in July

Via CBA:

Lowe signals another cash rate cut is imminent

  • Following Lowe’s speech today we are now expecting the RBA to cut the cash rate in July rather than August.
  • We expect another 25 basis point cut later in year, probably November, taking the cash rate to 0.75%.
  • Once again, the RBA have emphasised that there is a need for other policy arms to step up to help lift growth and reduce unemployment.

Lowe spoke today on “The Labour Market and Spare Capacity”.  The final few paragraphs were telling with the Governor stating that “it would, however, be unrealistic to expect that lowering interest rates by ¼ of a percentage point will materially shift the path we look to be on.”  To us this signals that another cash rate cut is imminent.  We now expect the next 25 basis point cut to be delivered in July rather than August.  After that we expect another 25 basis point cash rate cut later this year, probably November, taking the cash rate to 0.75% (see here for our thinking).

Once again the RBA reiterated that other policy arms are needed to help lift economic growth and reduce spare capacity in the labour market, including more infrastructure spending as well as productivity enhancing reforms.  Lowe noted that there “there are limitations to what can be achieved” with monetary policy.

In last week’s speech Assistant Governor Luci Ellis outlined the RBA’s new estimates of full employment.  The RBA now estimate full employment to be at an unemployment rate of around 4.5%.  With the unemployment rate at 5.2% there is still a fair degree of spare capacity in the labour market.

In today’s speech Lowe focused on some of the other measures of spare capacity, in particular underemployment and wages growth.  Lowe notes that underemployment has been relatively stable suggesting that “fewer inroads have been made into spare capacity in the labour market than suggested by looking at the unemployment rate alone”.

On wages growth, Lowe acknowledges the pick up in wages growth over the past year but notes that the lift has been fairly modest and is “below the rate that would ensure that inflation is comfortably within the 2 to 3 per cent range.”

While a high share of businesses are reporting difficulty finding suitable labour the RBA concludes that this is likely a result of underinvestment in staff training rather than a sign of labour market tightness.

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