Edition 39

While the Reserve Bank of Australia (RBA) has cut the official cash rate back to its post GFC record low of 3%, overall policy settings are nowhere near as stimulatory as they were in mid-2009. Bank lending rates are much higher, the A$ is way higher and fi scal policy is being tightened rather than loosened.

Even lower rates will be needed to boost the economy’s nonmining sectors as the mining boom fades at a time when the A$ remains strong and fi scal cutbacks are intensifying.

Post GFC caution has likely resulted in a reduction in the neutral level for bank lending rates, such that they are only just mildly stimulatory.

Standard variable mortgage rates will need to fall to around 6% at least, which implies that the official cash rate will need to fall to at least 2.5%. This is expected to occur during the first six months of next year, with the RBA cutting rates again in February by another 0.25%.

Bank deposit rates will fall further but the Australian share market is likely to be a key beneficiary as lower interest rates eventually boosts housing and retailing.