Another rate cut expected this year

Various measures of underlying inflation have been at the bottom or below the central bank’s target band for some time now. Because there is little evidence to suggest that growth in aggregate supply or productive capacity has lifted significantly, the onset and persistence of disinflationary forces in Australia and globally reflect deficient aggregate demand. Households have scaled back expectations of growth in future incomes, while the corporate sector has done the same about their future revenue growth prospects. The lift in risk premiums assigned to future expected cash flows by households and businesses confirms that animal spirits remain dormant. The role of a central bank is to use monetary policy to revive the psychology of risk taking. For those who remain sceptical about the efficacy of monetary policy at low interest rates, Australia would surely have experienced a recession had the RBA not delivered monetary stimulus to combat the lift in risk premiums. Evidente remains of the view that the RBA will deliver one more rate cut this year, most likely in August.