As expected, the Reserve Bank of Australia (RBA) reduced the cash rate by 25bps to 1.00% after instituting its first cut in 2019 in the month of June. The decision to reduce the rate for the second consecutive month was driven by three major issues i.e. rising unemployment; slowing economy; and the need to drive wage growth. This is the first back-to-back cut since 2012. Room for further rate cuts remains. But we think the impact of lower interest rates will be more muted than in the past because households are heavily indebted.

Nonetheless, we feel the RBA could push rates down to as low as 0.50%, implying room for a total of 50bps cut. At the moment, we have placed a 30% chance for the next rate cut to likely take place in November and another sometime in March 2020. In our view, interest rate cuts will help at the margin levels. What the economy certainly needs is fiscal support — either through tax cuts or spending increases.

• As expected, the Reserve Bank of Australia (RBA) reduced the cash rate by 25bps to 1.00% after instituting its first cut in 2019 in the month of June. The decision to reduce the rate for the second consecutive month was driven by three major issues i.e. rising unemployment, slowing economy and the need to drive wage growth. This is the first back-toback cut since 2012.

• Unemployment has been steadily rising in recent months. From a trough of 4.9% in February 2019 to 5.2% in May. Meanwhile, the GDP growth fell to just 2% — the weakest reading since the immediate aftermath of the global financial crisis 10 years ago.

• Room for further rate cuts remains. But we think the impact of lower interest rates will be more muted than in the past because households are heavily indebted. Bank lending conditions remain restricted. And because the economy is soft, wage growth is poised to remain slow which will put a ceiling on price growth.

• We feel the the RBA could push rates down to as low as 0.50%, implying room for a total of 50bps cut. At the moment, we have placed a 30% chance for the next rate cut to likely take place in November and another sometime in March 2020. In our view, interest rate cuts will help at the margin levels. What the economy certainly needs is fiscal support — either through tax cuts or spending increases.

Source: AmInvest Research - 4 Jul 2019