Bank says further cash rate cuts could be on the horizon

by Julia Corderoy21 Oct 2014
Australia’s sluggish employment growth could prompt the Reserve Bank to cut the cash rate further, according to one bank.

In a note to investors, Deutsche Bank said muted growth in the country’s gross domestic product and decreasing growth in the country’s gross domestic income will delay any improvements to the unemployment rate in the medium term – which was reported as 6.1% in September by the Australian Bureau of Statistics.

"Given our profile for real GDI growth, we see employment growth as soft for some years, with the unemployment rate peaking at 6.75 per cent come end-2015/early-2016 before a slow decline to [below] 6 per cent come the end of 2018," Fairfax quotes Deutsche Bank chief economist, Adam Boyton.

Boyton says the outlook for the cash rate is typically a function of the trends in the labour market, Fairfax reports.

But economists have questioned the authenticity of the unemployment data after the ABS issued a press release after the September figures were released, admitting it will have to revise its July and August unemployment figures because there is “little evidence of seasonality” in these months.

Australian Broker previously spoke to Savanth Sebastian, economist for CommSec, who said the recent employment data has painted a “murky picture” of the current employment landscape. 

“Not only does it make it difficult for investors and analysts to get a clearer picture of employment growth across the economy, but it will result in Reserve Bank policymakers being more cautious when it comes to interest rate decisions,” he said.

Boyton told Fairfax the growth in housing construction and benign inflationary pressures may also provide an argument for cash rate cuts.

"All up this generates a weak outlook for domestic demand, until the decline in mining investment has been worked through and fiscal consolidation is eased somewhat."