Australia Markets closed

Cash rate could hit 0.25% in stimulus void

Alex Druce
Economists say the RBA could cut the official cash rate to as low as 0.25 per cent by mid-2020

NAB economists now believe the Reserve Bank could cut the cash rate to as low as 0.25 per cent by mid-2020 if federal government continues to prioritise its "political objective" of a budget surplus.

The bank's economists, who had already tipped the RBA to cut to a new record low 0.75 per cent in November, have updated their outlook to include a further reduction to 0.5 per cent in February, when the central bank would also outline plans on so-called unconventional policy.

The NAB team led by chief economist Alan Oster believes the rate could go even lower if government holds back "meaningful" fiscal stimulus, with 0.25 per cent by the middle of next year a possibility.

"We continue to see the need for additional fiscal stimulus, through new infrastructure investment, cash hand-outs and/or the pull-forward of tax cuts," NAB said on Wednesday.

"(RBA) Governor (Philip) Lowe has repeatedly called for more help from fiscal policy, although to date the government is focused on the political objective of returning the budget to surplus, pointing only to possible tax concessions for business investment in the May 2020/21 budget."

The Reserve Bank cut the cash rate by 0.25 percentage points in June - the first movement in three years - and followed up with another in July as a measure to kick-start a flagging economy.

The RBA left it unchanged at a record low 1.0 per cent in August and September as it assesses whether the cuts were enough to stimulate economic growth.

A further reduction is widely expected by November as dismal construction, retail and import data piles up, jobs market slack remains stubborn, and wages continue to stagnate.

Last week's quarterly national accounts showed GDP had growth slowed to 1.4 per cent in the year to June, the lowest since the global financial crisis.

Reserve Bank governor Philip Lowe says he believes the government can do more to generate economic activity, having repeatedly said in recent months that it should not be left to monetary policy, or cutting interest rates, alone.

However, the central bank told MPs on Wednesday it is "unlikely" that it will need to employ unconventional monetary measures.

Prime Minister Scott Morrison has met with state leaders individually to urge them to nominate infrastructure projects that could be brought forward, but he also stipulates government must live within its means and deliver the surplus promised in the April budget.

Last week, ANZ senior economist David Plank tipped the RBA to cut rates at its next meeting in October, and to eventually cut to 0.25 per cent by May.

Meanwhile, NAB says an uptick in next week's August unemployment figure could force the bank to cut as soon as next month.

Unemployment was the key metric cited by the RBA for its last two rate cuts, with unemployment remaining at seasonally adjusted 5.2 per cent for a fourth consecutive month in July.