What could deter possible plans of a rate cut?

By Gerv Tacadena

There are still a few reasons why the RBA might not make cut rates that early.

The recent showing of weak consumer prices made it more likely for the Reserve Bank of Australia (RBA) to cut the official rates as early as next month. However, there are still a few reasons why the central bank might not make a move that early, according to two experts.

In a think piece in The Australian Financial Review, industry watchers John Kehoe and Matthew Cranston said the upcoming federal election is one case against the possible rate cut — the RBA would not want to get involved in a political conflict.

"A reduction in rates would signal to voters that the economy is not as strong. However, if the independent central bank feels a rate cut is warranted in May, it is likely to ignore the politics and do what it thinks is best for the economy," Kehoe and Cranston said.

Another reason why the RBA might not consider slashing the official cash rate is the state of employment in Australia; unemployment figures continue to sit near their lowest level in eight years. Furthermore, hiring intentions remain stable, indicating that a significant increase in unemployment in the near term is unlikely.

"As long as the RBA can credibly project an upward path for wages (then) that would serve as a reason not to cut rates. Wages are starting to edge up a bit more at a 2.3%, although that is yet to feed through to inflation," Kehoe and Cranston said.

Also Read: RBA might cut rates four times this year

The incoming tax cuts could also be a reason why the central bank might put rate cut plans in the backseat. Income tax rebates for low- to middle-income households are expected to help drive consumption and inflation.

"Economists estimate the income tax cuts are worth the equivalent of two 0.25 of a percentage point rate cuts, or a total of 0.50 of a percentage point according to Goldman Sachs and Commonwealth Bank of Australia economists," Kehoe and Cranston said.

Kehoe and Cranston also said that it might not be practical for the central bank to decrease rates too soon. If RBA does push through with the cut, it would not have enough room to make adjustments in case of a recession in the future.

"The economy is not showing signs of stress and with the cash rate already a very low 1.5%, the RBA should retain its interest rate ammunition in case a downturn does arrive," they said.

Even if the RBA ultimately decides to cut rates, the two said the move would only have a marginal positive effect on inflation and economic growth.

"Rate reductions take about nine to 18 months to fully impact the economy. If the RBA cuts rates once, it will be forced to consider a second follow up," they said.

Kehoe and Cranston believe that deflationary forces are not just a local problem and are linked to external forces, something which the central bank can only do so much about.

"Disinflation is a global problem. Competition from foreign workers and automation of jobs is keeping a lid on wages and price pressures. The RBA cannot do much about these forces," they said.

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