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Is a second interest rate cut on the cards?

Posted on April 27, 2016 by Kristy Hickey in Opinion Blogs

Interest rates could be cut again as soon as next month, throwing a wildcard into the election campaign, after the Reserve Bank released dramatically lower inflation forecasts, predicting price growth would remain below the bank’s target band up to 2018.

The cut would take the standard discount variable mortgage rate to 4.35 per cent, the lowest in records dating back to the 1950s.

As the government talks up its budget theme of “jobs and growth” and predicts higher living standards from its company tax cuts, the RBA is becoming increasingly concerned about the risks of low inflation. Whether the Reserve Bank cuts interest rates again will depend crucially on upcoming data releases. A stronger than expected jobs or wages report this month may put a cut off the cards.

On Friday 6 May the RBA slashed its 2016 inflation forecast from 2.5 per cent to 1.5 per cent and cut its 2017 and 2018 forecasts from 2.5 to 2 per cent. The surprise drop in interest rates by the Reserve Bank last week, in response to the equally surprisingly low inflation figures, has reset a lot of economic thinking on what might just happen in markets later this year.

After the election, the next inflation reading in late July will provide a valuable update on price pressures.

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