The Reserve Bank of Australia (RBA) is expected to keep the cash rate on hold tomorrow, despite moderate growth and inflation sitting below its target range, says HSBC.
In an HSBC global research report, The RBA Observer, the official cash rate is said to be kept at two per cent due to concerns over asset price misalignments and the need to affect sustainable growth.
“We expect the cash rate to be held steady at two per cent… and for the RBA to repeat its emphasis on the need for the [Australian dollar] to fall to assist the ongoing rebalance of growth,” the report said.
While a rate cut remains possible, HSBC indicated that the full effects of the RBA’s previous rate cuts of 50 basis points, are yet to filter through to the economy.
“There are also concerns that the benefits of cutting rates further could be outweighed by the costs,” the report stated.
“For some time now, the RBA has noted that cutting rates further is unlikely to have much impact on non-mining businesses investment intentions. At the same time, cutting rates further could create asset price misalignments.
“The RBA also has to consider the sustainability of growth and the risks posed by any distortions created by record-low interest rates.”
HSBC anticipates Q2 GDP data to show annual growth holding steady at 2.3 per cent.
Underlying inflation is also set at 2.3 per cent – lower than the RBA’s two to three per cent target range.
“[The expected inflation rate] means that rates could be cut with little concern about upside risks to inflation,” said HSBC.
“In short, lower rates are an option, but the CPI numbers do not suggest they are necessary.”
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