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8 reasons why the RBA won’t hold for long


The RBA may have left rates unchanged on Melbourne Cup Day but we expect to see a cut to 1.75% in the months ahead.

The Reserve Bank of Australia (RBA) left interest rates on hold at 2.0% on Melbourne Cup Day, November 2, 2015, despite announced mortgage rate increases from the major banks. They cited ‘firming prospects’ for an improvement in economic conditions and monetary conditions that are still ‘quite accommodative’ as key factors for not cutting the official cash rate.

As a result of the latest decision, the 0.15-0.2% increase in variable mortgage rates (announced by major banks last month) will now flow through to customers. The RBA appears hopeful that this will have little impact. In saying this, with economic growth remaining subdued and spare capacity continuing to build in the economy, it indicated that a lower than expected outlook for inflation may afford scope for ‘further easing of policy, should that be appropriate.’

We expect the RBA to act on its easing bias in the months ahead as:

  1. Big bank mortgage rate hikes are likely to weigh on retail sales in the run-up to Christmas;
  2. The non-mining investment outlook remains poor;
  3. Peaking building approvals point to a peak in the contribution to growth from home construction next year;
  4. 1El Nino related drought risks are posing an additional threat to growth;
  5. The terms of trade is still sliding;
  6. The Australian dollar risks a rebound if the US Federal Reserve continues to delay a move to higher interest rates and if other global central banks continue to ramp up monetary easing;
  7. Inflation is likely to remain below target; and
  8. The cooling Sydney and Melbourne property markets removes what was once an impediment to further monetary easing.

Our projection for SMSF investors:

The RBA will look to cut the official cash rate to 1.75% in the next few months, either in December or if not then in February next year.

About the author
Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

1El Niño has a strong influence on year-to-year climate variability in Australia. It occurs when sea surface temperatures in the central and eastern tropical Pacific Ocean become substantially warmer than average and this causes a shift in atmospheric circulation. The shift in rainfall away from the western Pacific, associated with El Niño, means that Australian rainfall is usually reduced through winter–spring, particularly across the eastern and northern parts of the continent.

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