Monetary policy has been unchanged in Australia since August 2016, but the Reserve Bank of Australia’s Governor Philip Lowe has moved on his previous neutral bias narrative. In a speech delivered today he said that “at our meeting in two weeks' time, we will consider the case for lower interest rates.”

CBA Senior Economist Gareth Aird says persistently below target inflation, below trend GDP growth and a slight rise in the unemployment rate mean that “policy easing now looks imminent”.

CBA economists have today changed their position on an RBA cash rate cut. They had previously believed that the RBA would keep the policy rate on hold because of the strength of the labour market however “strong employment growth alone looks insufficient to fend off rate cuts,” said Mr Aird.

Both materially lower than expected inflation and an increasing unemployment rate for two consecutive months due to increasing participation were singled out as reasons for the impending interest rate cuts to help stimulate the economy.

“It is due to the combination of these two events that we think will see the RBA cut the cash rate by 25 basis points to 1.25 per cent when the Board next meets on 4 June. A further rate cut looks probable and we think that it will most likely arrive at the August Board meeting,” said Mr Aird.

“The risk is that a second rate cut arrives later than August because of impending tax relief and recent developments related to the housing market. We believe that the probability of the cash rate going below 1.0% is very low,” Mr Aird said.

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