The Reserve Bank of Australia (RBA) cut interest rates by another 25 basis points this month, down to 3.85%, and one economist expects there is wiggle room for much bigger cuts to come.
While mortgage holders and potential property buyers rejoiced at news of lower mortgage repayments, many market players have started asking: How much lower can we expect the cash rate to go?
At the latest monetary policy board meeting, RBA governor Michele Bullock flagged the prospect of more rate cuts if inflation stayed sustainably within the 2-3% target band.
Financial markets widely expect the Reserve Bank to cut rates to around 3.10% by the end of the year.
For example, BetaShares' chief economist David Bassanese, said last week that he expects the RBA to cut the official cash rate to "a more normal or neutral level" of "around 3%".
But Tim Toohey, major money manager at Yarra Capital, and previous Goldman Sachs chief economist, is more optimistic that rate cuts could be more aggressive than we expect.
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Five quarter-point rate cuts to come
Toohey expects five quarter-point rate cuts, to 2.6%, by August next year, the AFR reports.
"Toohey said he had two reasons for this unorthodox position. First, he said, the RBA was too optimistic about the Chinese economy – crucial for Australia's own, given the close ties between the two countries," the AFR said.
The Reserve Bank's forecasts expect there will be good news from China over the next year as the trade war with President Trump eases.
But Toohey expects that big tariffs on Chinese goods would push more products into Australia, sending prices lower.
"The RBA is now highlighting that China is a relative winner from the trade war, at least in the outlook period," he said.
He added that the central bank is downplaying the impact as Trump continues to toy with more tariffs, such as those on European imports.
"If you think the RBA is too optimistic on China's forecasts, you should be expecting much deeper rate cuts than those implied by interest rate futures," he said.
Rate cuts and the ASX
The S&P/ASX 200 Index (ASX: XJO) had a solid run of gains leading up to the RBA's interest rate announcement on 20 May.
The benchmark Aussie index jumped nearly 0.6% over the course of the day, and up another 0.5% on 21 May.
At the time of writing on 27 May, the index is trading at 8384.60 points, down marginally (around 0.02%) since the RBA announcement last week, but up 0.28% for the day.
The next RBA Board meeting and official cash rate announcement will be on the 8th July.
