The RBA this week announced a reduction in the cash rate by 0.25% to 1.75%, the first movement since the May 2015 board meeting.
Before the decision was made many believed Australia’s current political environment would result in the RBA leaving the cash rate untouched, but Peter Jolly, global head of research for global markets at National Australia Bank said decision to cut the cash rate was the right one.
Jolly said the decision to move the cash rate to its now record low mark was justified given the current rate of economic growth.
“It was not because the economy is trending down and needs help and needs resuscitation. The economy is growing moderately; it’s growing very fast in New South Wales and slow elsewhere,” Jolly said at a NAB budget event this week.
“What’s also true is that inflation is exceedingly low. We had an inflation number printed last week which said that inflation in the first quarter was basically the lowest on record in Australia,” Jolly said.
Jolly said it’s that inflation number that likely proved the tipping point in RBA deliberations at this week’s board meeting.
“The board’s job is to think about how can I grow the Australian economy as quick as I can and how can I get as many people as possible employed as quick as I can without causing damage?” he said.
“I think they correctly made the judgement that we can afford to grow a bit more quickly [and] unemployment’s falling, but perhaps it can fall a bit more quickly and there’s no real threat on the inflation front.”
While Jolly said NAB believes the RBA will most likely leave the cash rate untouched for a stretch, he said a cut in the near future remains a distinct possibility.
“Having cut rates to 1.75%... our current forecast is that they will sit at 1.75% for a good period, but I think it’s very obvious to say that there is another risk that they may need to cut rates again.
“I don’t think there’s going to be anything in the next couple of months, but if we do get another low inflation print… then I think it’s definitely possible that they may cut rates again in August.
“Generally, we see interest rates staying quite low in Australia over the next few years.”