RBA’s finger on the rate cut trigger – how Lowe will they go? RBA’s finger on the rate cut trigger – how Lowe will they go? RBA’s finger on the rate cut trigger – how Lowe will they go?

RBA’s finger on the rate cut trigger – how Lowe will they go?

Macro 5 minutes to read

Summary:  The Reserve Bank of Australia has begrudgingly succumbed to the realities of the "lucky country's" slowing economy and today signalled that it is ready to fire on rate cuts.

RBA’s finger is on the trigger for rate cuts, how Low(e) will they go
The RBA have begrudgingly succumbed to the realities of the slowing economy, with pervasive weak inflationary pressures, consistently below target, and stagnant wage growth signalling today they are ready to fire on rate cuts.

This change of course means that after a prolonged period of weak inflationary pressure and stagnant wage growth, the central bank's hope that the labour market would strengthen and inflation would return to its target range, has been overcome by reality. In a speech today delivered to the Economic Society of Australia in Brisbane RBA Governor Philip Lowe gave a clear signal that rate cuts are coming and that their finger could be on the trigger as early as June. 

Lowe referenced May’s monetary policy meeting where the RBA held back from cutting the cash rate, “Earlier today, we released the minutes of the Board's meeting two weeks ago. At that meeting, we discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5 per cent mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate.” 

Last week we saw that the unemployment rate has now increased to 5.2% in April, up from an 8 year low of 4.9% in February. Given the RBA has abandoned other indicators of economic health to explicitly tie the outlook for monetary policy to the labour market, reading between the lines a decrease in the cash rate should now be deemed appropriate by the RBA. Particularly as spare capacity also picked up and several leading indicators are pointing to a slowdown in hiring ahead meaning unemployment has the potential to further increase; ANZ job ads, the NAB business survey employment index, capacity utilisation, SEEK job ads also contracted 10% in April.

Lowe as good as confirmed this move in the denouement of his speech “at our meeting in two weeks' time, we will consider the case for lower interest rates.” We have long forecast that the RBA would be backed into a corner where rate cuts were inevitable but would not capitulate until the labour market deteriorated. With this now in play we expect the RBA to cut the cash rate by 25 basis points to 1.25% at its June 4 policy meeting. This would take the RBA's cash rate target to a new record low of 1.25%, after nearly three years on hold at 1.5%, following its last rate cut in August 2016.

Financial markets are in full agreement, and futures are now pricing a 91% probability that a rate cut is delivered next month. 

The RBA also made a point to highlight that monetary policy is not the only game in town and called upon the government to increase spending. A message also to the senate crossbench not to obstruct and potentially delay tax cuts announced by the Morrison government in the April Federal Budget.  Media channels have reported that these tax cuts are likely to be delayed until 30 June 2020 because parliament is unlikely to resume in time to pass the measures, despite the Australian Taxation Office saying otherwise.

“In the event that the unemployment rate does not move lower with current policy settings, there are a number of options. These include: further monetary easing; additional fiscal support, including through spending on infrastructure; and structural policies that support firms expanding, investing and employing people. Relying on just one type of policy has limitations, so each of these is worth thinking about.”

This plea from the RBA is not just reminiscent of the impotence of monetary policy fast approaching the zero-lower bound, but a wake-up call to the newly elected Morrison government. The downside risks stacking up against the Australian economy will not evaporate upon 50bps of rate cuts. A coordinated response and focus on productivity reforms, infrastructure spending and other fiscal measures will be necessary to reignite confidence and a self-sustaining recovery in economic growth.   

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.