• While the 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 fiscal policy is being tightened not loosened.
• Even lower rates will be needed to boost the non-mining sectors of the economy as the mining boom fades at a time when the $A remains strong and fiscal 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 2.5% at least. This is expected this to occur during the first six months of next year, with the RBA cutting 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 boost housing activity & retailing.

To read this edition of Oliver’s Insights, click here.

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