Will the RBA cut interest rates on Cup day?

Following yesterday’s lower than expected inflation data, and concerns about the Euro zone, there is speculation the RBA board will cut interest rates on Melbourne Cup day (Low inflation raises case for RBA rate cut). I doubt the board will cut rates, however, as they would be moving against the general upward trajectory that they know interest rates have to go over the next few years as the economy returns to long-term trend growth rates.

And as observed by noted Australian financial economist Chris Joye here “The fact is 25bps here or there is not going to make a world of difference to anything”, although Mr Joye is forecasting a one-off cut on Cup day.

Partly for the sake of appearing to know what it’s doing, in my view, the RBA won’t cut. The cash rate (the short-term interest rate the RBA controls) is currently at 4.75%. I expect the RBA would have in mind eventually increasing this to somewhere in the 5.5-6.0% range – traditionally viewed as the neutral cash rate range – as the economy picks up in response to the big pipeline of resources sector investment.

There is, however, a large debate on the level of Australia’s neutral cash rate, which I’ll try to cover in a future post. On this topic, this note from Shane Oliver is a good read:

How high will the Australian cash rate go?

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