Employment data to decide cash rate

by Madison Utley07 May 2019

While the majority of experts are predicting a cash rate cut, whether this afternoon or sometime later this year, an economist at a major bank who formerly spent ten years at the RBA has a different take.

CBA senior economist Kristina Clifton said, “We have the RBA on hold at 1.5% for the next couple of years. Basically, the foreseeable future.”

According to Clifton, the proof is in the strong labour market.

She explained, “The economic data over the second half of last year, particularly the GDP data, came in quite weak. But at the same time, the jobs market has been very strong with the unemployment rate staying at 5%, the level the RBA says is full-employment.”

While the two data sets call for conflicting action, the RBA has been “explicit” that the trends in the labour market are the more accurate indicator of the state of the economy and will determine the next move.

“[RBA] Governor Lowe has said it would take a sustained rise in the unemployment rate for them to cut the cash rate,” Clifton explained.

The senior economist also addressed the personal income tax cuts announced in the latest budget.

“Those kick in from the first of July. We think that’s going to be enough stimulus to prevent the RBA needing to cut the cash rate,” she said.

While Brian Hartzer, CEO at Westpac, does expect the cash rate to be cut, he has expressed similar doubt that adjusting the rate will rectify the issues in the economy.

He elaborated, “We’re expecting two cuts to the cash rate this year. To be clear though, interest rates are not the problem.

“The question we should be asking is how do we get businesses to invest, to grow and employ more people, which would raise wages and support spending.

“We must try policy changes that incentivise investment, improve productivity, and build business and consumer confidence. That means tax reform, reducing red tape, providing policy certainty, and having regulations that make it easier for businesses to borrow,” he concluded.

More information to follow upon the cash rate announcement this afternoon.