It seems likely that given the damage caused by the bushfire issues in Australia and their impact on GDP that the RBA will cut interest rates by a further 25 basis points in their February meeting.
Economists are suggesting that the odds are 68% in favour of this occurring.
Whether this will deliver the stimulatory effect that the RBA and indeed the Federal Government is looking for will remain to be seen.
With both sluggish wage growth and productivity, we don’t see that further interest rate cuts will have the effect that is desired by the RBA. Wages growth, in particular, has been somewhat stagnant at around 2% for several years, after taking into account inflationary figures wage growth has been minimal. It seems that many economists are a little baffled as to why this is so and indeed it is an international problem among many developed economies. Obviously, if we have reasonable wage growth it provides more disposable income which is, of its own accord, normally provides the desired stimulatory effect to the economy.
Given the rapid rise of permanent and temporary migration wherein there is competition for unskilled labour then it is not surprising that wages growth continues to be sluggish.
Add to this a lack of improved productivity and the current record low interest rates it seems to us that even with a further cut the RBA does not have many more levers to pull to stimulate the economy. The question will be whether there will be a further reduction to 0.25%. In any event, we do not see the likelihood of any rises in rates in the foreseeable future.