Major bank predicts RBA will cut rates to 1.5%

by Julia Corderoy28 Sep 2015
Two senior economists at ANZ expect the Reserve Bank to drop the official interest rate to a new record low of 1.5% due to the troublesome global economy and stubbornly high unemployment.

ANZ chief economist Warren Hogan and senior economist Justin Fabo, who previously forecast the RBA would keep rates on hold at 2% throughout 2015 and 2016, have argued that worsening global conditions and weak growth in the non-mining economy will force the central bank to lower the cash rate further, Fairfax has reported.

“Risks to growth in Australia's major trading partners in Asia, and Australia's terms of trade, are skewed to the downside, with China in particular facing several significant challenges,” the economists said, according to the Fairfax report. 

“Governor Stevens has previously noted that growth in the non-mining economy needs to be above average for a couple of years to eat into spare capacity – at best it is currently around average with little prospect of improving much in our view. At the same time, mining investment has much further to fall.

“The economic backdrop we have outlined above points to greater risk that unemployment worsens rather than improves over the next 12-24 months. Governor Stevens’ ‘path of least regret’ suggests he will need to cut rates again.”

Whilst they said it is difficult to pinpoint the timing of the cuts, they are “pencilling in” 25 basis point cuts in February and May.

An official cash rate of 1.5% would be the lowest ever seen since the RBA was given the power to set monetary policy independently of the government.

However, don’t hold your breath for lower home loan rates. According to UBS banking analyst Jonathan Mott, home loan rates will rise regardless future cash rate decisions, as the pressure on banks to strengthen their capital position heats up.