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More rate cuts on the cards in 2016

The Reserve Bank of Australia (RBA) may well be forced to cut the official cash rate early in 2016, as the commodities slide continues.

Governor Glenn Stevens recently said that the central bank will consider lowering interest rates when it next meets again in the first week of February 2016. “I’m more than content to lower it if that actually helps, but is it the best thing to do at a particular time?” he said.

As for February, that’s three months away, we’ve got Christmas, we should just chill out and see what the economic data says.

The key factors the RBA considers when it looks at the official cash rate is Australia’s economic growth and the rate of inflation. The RBA is tasked with keeping inflation in a range between 2% and 3%, but economic data suggests we are dragging along the bottom of that range, if not below it.

That follows comments from the deputy head of Treasury Nigel Ray that the economy’s growth rate would be lower in the next few years. The forecast growth rate was now 2.75%, down from the 3% estimate when the government delivered its May budget.

The problem the central bank faces is that as the official cash rate has fallen, small moves of 0.25% have less impact. There’s not much difference between a rate of 2% and 1.5%.

With commodities prices falling, particularly iron ore, coal and oil, and particularly as China’s growth slows, the Australian dollar remains stubbornly above US 70 cents.

One thing the central bank won’t be worried about is overheating in the property market – which has boomed on the back of record-low mortgage interest rates. He can thank the major lenders including Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) taking steps to limit investor loan growth for the recent pullback in house prices and auction clearance rates.

Foolish takeaway

Global interest rates are expected to stay very low for a good part of the period ahead, according to Mr Stevens. That’s despite expectations that the US Federal Reserve will begin raising rates when it meets next week (December 15-16), which should see the Australian dollar fall below US 70 cents.

But that might not be enough to stimulate our economy, and Australia could see an interest rate with a 1 in front of it in 2016.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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