Cash rate cut off the cards?

by Julia Corderoy28 May 2015
The cash rate is likely to have hit its floor at 2%, and will start rising to a new normal of almost 4% next year.

Economists and analysts unanimously agreed that the cash rate would remain on hold at 2% when the Reserve Bank meets next Tuesday 2 June, according a Reserve Bank survey conducted by, while almost two in three (62%) expect no cash rate moves at all this year. 

However, just over two in three (68%) are expecting the cash rate to start rising next year. The majority of economists and analysts surveyed expect that the cash rate will start to rise to a new normal of 3.7%, while 24% expect the cash rate will continue to rise above 4%. Interestingly, 6% of those surveyed are forecasting it could reach a new normal as high as 5%.

As a result, 82% of those surveyed are expecting to see more borrowers lock in a fixed rate home loan due to concerns about rising rates. Of these, 62% expect more borrowers will turn to fixed rates this year, while 21% don't think more borrowers will fix until next year. 

In a speech at the Corporate Finance Forum earlier this month, after the central bank cut the cash rate to 2%, deputy governor of the RBA Philip Lowe said further monetary policy easing is unlikely to be in their long-term interests.

“It is, however, unlikely to be in Australia's long-term interests to engineer a consumption boom by encouraging people to borrow large amounts against future income. This is especially so when debt levels are already high and prospects for future income growth are not as positive as they once were.

“So, there is a fairly fine line to tread here. The RBA's recent decisions have sought to strike a prudent balance – to help encourage consumption growth and thus business investment, but avoid the type of imbalances that could cause problems later on. We will continue to assess that balance carefully.”

However, he maintained that the central bank is seeking to play a “constructive role” in boosting the economy. 

“In this challenging global environment, the RBA is seeking to play a constructive role. As I said earlier, low interest rates are supporting spending in the economy. The further reduction in the cash rate earlier this month will provide a bit more support and it will help reinforce some of the recent encouraging signs, particularly in household spending,” Lowe said.