Two prominent economists have praised the Reserve Bank of Australia’s decision to reduce the cash rate and predicted at least one more cut to come.
Domain Group senior economist Andrew Wilson said the Reserve Bank had made the right decision to reduce the cash rate from 2.5 per cent to 2.25 per cent.
Dr Wilson also said another cut is likely, given that the economy received minimal stimulus from the succession of rate cuts between October 2011 and August 2013.
“We haven’t had much action from cutting from 4.75 per cent to 2.5 per cent, so I’m not sure what a 0.25 per cent improvement is going to do,” he told Real Estate Business.
“Certainly the Reserve Bank had to act – it’s really the only tool in the box that we’ve got left.”
AMP Capital chief economist Shane Oliver said the Reserve Bank had been forced to cut rates – and that there were good reasons for it to cut again.
“Growth is too low, running at around 2.75 per cent through last year, which is well below potential of around 3.00-3.25 per cent, and the level needed to prevent a rise in unemployment,” he said.
“Confidence is subdued, having well and truly given up the post-2013 federal election boost.
“Partly reflecting this, consumers have started to become more focused on paying down debt again, which is a sign of increasing caution and will threaten spending if sustained.”
Mr Oliver said the Reserve Bank would also be feeling the pressure from the rate cuts being made by the central banks of many other countries.
“To the extent it is forcing monetary easing around the world, it adds to confidence that sustained deflation can be avoided. Australia is not immune,” Mr Oliver said.
“As the Reserve Bank wanted to see a continued broad-based decline in the value of the Australian dollar, it had to re-join the easing party lest the Australian dollar rebounded.”