Dr Brendan Rynne, KPMG Chief Economist, comments on RBA decision and other economic data
The RBA was right to keep rates on hold at 1 percent today and leave any further cuts till later in the year. There was no clear reason to cut again yet and with limited ammunition left, the RBA sensibly kept its powder dry.
A further 25bp cut in November has been priced in by the bond markets so won’t cause the economy to overheat in the short to medium term.
But 1 percent is likely to be close to the lowest rate before more aggressive, non-conventional forms of policy intervention would need to be considered.
That’s not to say the RBA should stop adjusting the cash rate once it hits 1 percent when 0 percent is the actual lower bound; rather, cutting rates below 1 percent is unlikely to be effective in reducing the interest rates faced by businesses and households.
In those circumstances conventional monetary policy is ineffectual and non-conventional approaches such as quantitative easing and “helicopter money” would need to be considered, to put cash in the hands of the public to spend.
We have not yet reached that position. But it is already abundantly clear that monetary policy won’t do all – or even most – of the heavy lifting to stimulate the economy.
As to the GDP figures released on Wednesday, we have predicted they will show 1.4 percent growth. Last week’s June quarter private capex results suggest real GDP for the June quarter will end up around $464 billion, which represents annual real GDP growth of about 1.4 percent to 1.5 percent; And we expect the previous quarter’s sluggish retail figures, which showed the current weakness in consumer expenditure, to continue this week. KPMG’s forecast has the economy growing by 1.9 percent over the 2019 calendar year.
With slow growth, fiscal stimulus is needed – a mechanism to get money out to consumers to spend; particularly low to middle income households who typically spend rather than save. Raising Newstart would be a way of doing this – and getting new targeted infrastructure projects up and running as quickly as possible.
More widely, Australia needs a comprehensive agenda of fiscal policy measures targeted at the short-medium term, allied to productivity reforms and tax reforms rebalancing tax receipts away from Corporate and Personal Income taxes and towards a higher consumption tax mix.