Expect another cash rate drop, says economist

by Julia Corderoy25 Jan 2016
The Reserve Bank of Australia (RBA) will be forced to cut the cash rate below 2% before year end, a prominent economist has predicted.

According to Dr Shane Oliver, the chief economist at AMP Capital, recent global economic instability will pressure the RBA to shave the cash rate by a further 25 basis points this year. 

“The latest bout of global growth worries warns that the global environment Australia faces remains messy. So while rebalancing away from mining will continue to help we may face another year with growth stuck around 2.5%,” Oliver said.

“Ongoing commodity price weakness means ongoing pressure on the budget deficit, points to more downwards pressure on the $A and more pressure on the RBA to cut interest rates again. Expect the $A to fall to around $US0.60 by year end and the RBA to cut the cash rate to 1.75%.”

The main global concerns, according to Oliver, are uncertainty regarding the Chinese economy, wariness about the Fed raising interest rates and the impact of a rising US dollar and falling Chinese Renminbi.

2016 has also seen a bad start to the share markets. Share markets around the globe have seen sharp declines so far this year, says Oliver, with US shares down 5.2%, Eurozone shares down 6.2%, Japanese shares down 9.5%, Chinese shares down a significant 14.6% and Australian shares down 6.8%. 

Oliver says these latest falls have taken global shares back to around the lows seen during the second half of last year. In addition, commodity prices are down further with the oil price falling to its lowest since 2009. 

However, Oliver says while we should expect weak growth and accommodative monetary policy to hang around longer, there should be no concern about a global recession.

“But while risks remain high in the short term there are several reasons not to be too concerned. In other words, if we do go into a bear market in developed market shares it is likely to be relatively shallow unlike say the GFC falls of 50% plus and we continue to see shares having a better year this year than last,” Oliver said.