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RBA makes cash rate call for August

The Reserve Bank of Australia has made its latest call on the official cash rate.

Recent localised lockdowns have cooled chatter of an impending rate hike, with the central bank announcing on Tuesday it has held the cash rate at a record-low 0.1 of a percentage point for another month.

For months speculation has been running wild about interest rates rising before the RBA’s long-term “deadline” of 2024, but with Greater Sydney under strict stay-at-home orders and several other capitals in and out of short circuit breaker lockdowns, chatter appears to have been premature.

“It comes as no surprise that the Board of the Reserve Bank of Australia today announced the holding of the Official Cash Rate (OCR) at its record low of 0.10 per cent,” Harley Dale, chief economist at CreditorWatch, said.

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Mr Dale noted that while the RBA “clearly” stands ready to maintain its stimulus support for the Australian economy, “they’ve effectively done all they can”.

“The dynamic of the Australian economy has changed substantially in the past month, and the ball is now in the court of the federal government,” Mr Dale said.

Sydney’s prolonged lockdown has sparked fears of another recession. In fact, several economists don’t have any doubt that Australia will record a GDP contraction in September, with NAB’s Gareth Spence putting the drop at between 2 and 2.5 per cent.

“The biggest hit to the economy will come through household consumption, mostly with services although goods might also fall as well given the extent of lockdowns,” he said.

Should the lockdown stretch into early September, Mr Spence is confident the country could succumb to back-to-back negative quarters.

As such, economists have slightly changed their tune, with many now conceding that the RBA is a long way from meeting its conditions for a rate hike as lockdowns halt progress.

“The latest coronavirus outbreaks and lockdowns risk delaying progress towards its goals,” Shane Oliver of AMP Capital, said.

Similarly, Mark Brimble of Griffith University, said that “there is still a long way to go with COVID to get to a firmer future state and thus persistent inflation to start to come through.”

In June, both Westpac and Commonwealth Bank detailed rate hike predictions, with the latter foreseeing a rate lift as soon as November 2022.

But as the lockdowns set in, CBA moved quickly to issue a revised economic forecast, predicting a 2.7 per cent slump in activity in the September quarter.

“A deep contraction in GDP over Q3 21 is now a fait accompli,” Commonwealth Bank’s head of Australian economics, Gareth Aird, said. And although he did not address the bank’s earlier cash rate predictions, CBA’s gloomy forecast doesn’t relay optimism.

RBA makes cash rate call for August
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