Although businesses were buoyed following the outcome of the federal election in May, there are economic headwinds on the horizon which could leave to more historic monetary policy shifts.
Last week, the Reserve Bank slashed the cash rate to a historic low of one per cent, the second consecutive cut this year.
The RBA is aiming to lift inflation and lower unemployment. Non-major banks like ING think this latest round of cash rate cuts won’t be sufficient to hit unemployment targets, but will put a dint in inflation goals.
As such, Australians should expect another cut, but ING thinks there will be more breathing space between this month’s cut and the next move.
“Although it is highly doubtful that 50bp will be enough to bring the unemployment rate down to the levels the RBA believes will be necessary to drive up wages and inflation,” ING said in an update this week.
“The RBA is not going to rush the next cut and we may have quite a pause for them to digest how the first cuts are working out. We thought the RBA might take more time with their earlier cuts, so are a bit surprised at this approach, but it can be rationalised as trying to get the most out of what is a very limited supply of ammunition of questionable effectiveness,” ING added.
“Markets, which had been undertaking a sort of US-style aggressive pricing of easing were already scaling back on this in the aftermath of the G20 meeting and have gone further since. We now see rates troughing at 0.75 per cent after one more rate cut in the fourth quarter, though this is dependent on some slightly stronger price and activity data,” ING said.
“We don’t hold out any realistic hopes for the RBA to hit their inflation target anytime soon.”