Chart of the week: Should the Reserve Bank cut interest rates to support Australia's economic growth?
8 May 2019
Bob Cunneen, Senior Economist and Portfolio Specialist
RBA cash interest rate vs leading indicators
Source: Reserve Bank of Australia and Datastream.
The Reserve Bank of Australia (RBA) is under considerable pressure to cut interest rates. This seems extraordinary given that Australia’s cash interest rate stands at a low 1.5% (blue line). However there seems to be a strong case to cut interest rates further given Australia’s current economic growth is sedate and inflation is subdued.
Australia’s economic growth appears to have slowed to a crawl since the middle part of 2018.The leading economic indicators provide a guide to whether economic growth is accelerating or slowing. Recently these leading indicators have been very disappointing (red line). Soft business surveys, weak housing construction and falling car sales suggest the Australian economy is struggling.
However the evidence is not yet conclusive. These leading indicators may overstate the economy’s weakness given that they do not capture strong infrastructure spending and improving business investment prospects. The Federal Budget’s income tax cuts for low to middle income earners could also prove very beneficial to consumer spending. Australia’s labour market also remains solid with strong jobs growth and the unemployment rate remaining stable at 5%.
To avoid a rush to judgement, the RBA is likely to spend the next few months weighing up all this conflicting evidence on whether cutting interest rates is justifiable.
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