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RBA Has More To Do – How Low Will The Cash Rate Go?

Bank of Australia (RBA) will have to cut interest rates further to boost the non-mining sectors of the economy as the mining boom fades at a time when the Australian dollar remains strong and fiscal cutbacks are intensifying.

After the global financial crisis (GFC) caution has likely resulted in a reduction in the neutral level for bank lending rates, as they are only now starting to become stimulatory.

Our assessment remains that standard variable mortgage rates will need to fall to around 6%, which implies that the official cash rate will need to fall to 2.5%. We expect this to occur over the next six months, with the RBA cutting again next month by another 0.25%.

Bank deposit rates will fall further, but the Australian share market is likely to be beneficiaries as lower interest rates eventually boost housing activity and retailing.

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