RBA Indicates Interest Rate Cut In June

Addressing to the Economic Society of Australia in Brisbane on Tuesday, the Reserve Bank of Australia (RBA) Governor, Mr Philip Lowe, has given the strongest indication of interest rates cut in June. The motive behind the interest rate cut is reducing unemployment to a level below 5 per cent to help inflation return to target.

The labour force data released recently by the Australian Bureau of Statistics (ABS) indicated a rise in unemployment rate to 5.2 per cent in April 2019. According to Mr Lowe, a reduction in cash rate would aid employment growth, and will bring inflation in line with the target. The ABS reported disappointing inflation figures in the first three months of this year.

Apart from rising unemployment level and unsatisfactory inflation figures, declining property prices have also played a role in the slowdown of the Australian economy in last few months. Overlaying the downturn, the unresolved trade dispute between the U.S. and China is impacting the economic soundess as well as the Australian share market.

Considering the continuous drop in property prices, the Australian Prudential Regulation Authority (APRA) has proposed a plan to scrap 7% home loan buffer.

The financial markets have now raised the probability of a likely ‘0.25 percentage point rate cut next month’ to 92 per cent. If the RBA moves forward with the rate cut, it would be a first cut after almost three years. The rates have been stagnant at 1.5 per cent post a rate cut in August 2016. Early in May, RBA kept the cash rate steady at 1.5 per cent for the 30^th consecutive meeting, despite a significant level of anticipation over rate cut.

In the wake of falling property prices and weak household incomes, the RBA also downgraded the near-term consumption and dwelling investment levels recently. Besides this, the bank also lowered the forecasts of economic growth and inflation.

The RBA Governor is also putting pressure on the Morrison government to focus on strengthening economic growth and employment by introduction of structural reforms and increasing spending on infrastructure. Morrison government recently secured a majority in Australia’s federal election.

Mr Lowe thinks that monetary policy needs to be accompanied by structural policies for driving stronger growth. He believes that the structural reforms potentially related to tax, industrial relations, skills and education could drive economic growth. He is of the view that increased spending on infrastructure adds to supply capacity in the economy and makes a lot of lives better, besides helping with demand management.

Mr Lowe expects a gradual improvement in consumer spending based on the anticipated rise in household income, and a stabilisation of the housing market in the days ahead, expected with APRA’s plan to ease lending regulations.

The Australian dollar dropped to a day’s low near 68.90 cents on Tuesday following the announcement of likely rate cut in June.

The S&P/ASX 200 closed higher today at 6510.7 points, up by 0.2 per cent relative to last closing price. BIN, LYC, PLS, GXY and SWM were the best performers on the ASX while FMG, IFL, ALQ, MPL and SYR were the worst performers.

The table below shows the closing price of the top gaining and top losing stocks on the ASX 200 on 22^nd May 2019 and their respective percentage gain or loss relative to last close:

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