Rising temperatures could force the RBA to cut rates

by Julia Corderoy29 Oct 2015
As Australian temperatures heat up heading into summer, a global investment bank says our scorching temperatures could impact economic growth and put pressure on the Reserve Bank to cut the cash rate to a new record low.

According to a report by Bloomberg, Goldman Sachs says the strongest El Nino in 18 years and cooler ocean temperatures around Indonesia will combine to produce weather that parches Australia’s farms and threatens to cut growth in 2016 to the weakest in 24 years.

This is because a drought will cause a fall in rural production in an economy already struggling with weak commodity prices and record-low private sector wages.

“The drought just isn’t in anyone’s numbers,” said Tim Toohey, chief economist for Goldman Sachs in Australia, according to Bloomberg

“A drought in a period where non-farm economic growth is already forecast by policy makers to be well below trend and inflation pressures contained is a sufficient reason to warrant additional monetary easing.”

According to the Bloomberg report, Toohey forecasts Australia’s economy will expand by a below-average 2% in 2016, but says his estimate may be decreased further when the impact of the drought becomes clear. 

“Growth of 1.75% is certainly possible, maybe a little bit below that,” he said. An annual expansion of less than 1.7% would be the weakest recorded since 1992.

The latest inflation figures released by the Australian Bureau of Statistics yesterday also reveal that CPI increased below expectation in the September quarter, rising by 0.5%. The annual rate of inflation held steady at 1.5%. 

According to Savanth Sebastian, economist at CommSec, this means that the Reserve Bank may need to trim its inflation forecasts, which again puts another rate cut on the table.