Reserve Bank will not reduce interest rates

Unless there are clear signs of rising unemployment and a further deterioration in the global outlook the Reserve Bank will not reduce interest rates, even though there is still room for at least two further interest rate cuts.

Economists have stated that the fate of the labour market will be key to any central bank move, although the size of any more reductions are now expected to be relatively modest.

After delivering 125 basis points worth of cuts across February and April the RBA has kept the official cash rate unchanged for the past two months. At the last board meeting before the end of the 2008/09 financial year, the RBA stated that they did not see a pressing case for any further action.

Economic data released recently has shown that Australia is holding up well in response to the global recession, retail sales are healthy, the economy expanded in the March quarter and housing loan numbers have increased.

Reassessment of Interest Rate forecasts

Due to these results a more optimistic platform for the economy has been revealed and resulted in a reassessment of how low the cash rate can fall during the current easing cycle.

A number of economics research houses predicted at the beginning of the year that the cash rate would bottom out at 2 per cent by the end of 2009. Many have now raised their forecasts by about 50 basis points and pushed back the timing of any further cuts to the end of 2009 or early 2010.

Ray Attrill, 4Casts head of research has stated that they now expect the official interest rate to bottom at 2.50 per cent by the end of the year and that it won't be before November and that there is enough accumulated evidence to change the RBA's decision on interest rates. The only possible way that the RBA would consider reducing interest rates would be if there were back to back months of relatively bad unemployment figures.

The nation's jobless rate stood at a five year high of 5.7 per cent in May. Treasury forecasts published in the 2009/10 federal budget papers indicated the unemployment rate was expected to reach 8.25 per cent at the end of 2009/10 before peaking at 8.25 per cent in 2010/11.

Any rate cut would send official interest rates to all-time low

A rate cut of 25 basis points or more, would send a cash rate below the all-time low of 2.89 per cent, recorded in January 1960.

Westpac has tipped the cash rate to bottom at 2.5 per cent, with two 25 basis point cuts expected in the first half of 2009/10. Bill Evans Westpac's chief economist stated in a research note that it will be at that time that we expect the bank will recognize the need to restore some confidence with some further monetary easing.

RBC Capital Markets however expect that there will be no further cuts in the current cycle, after initially predicting the cash rate to bottom at 2.50 per cent. Su- Lin Ong RBC's Capital Markets fixed income strategist felt that while the RBA was prepared to cut rates further, it would need to see a further deterioration in the global economic outlook to act.