• The Reserve Bank of Australia (RBA) is expected to cut the cash rate 0.25% to 1.0%
  • 1.0% would be a record low for the RBA base rate
  • Unemployment and GDP are the bank’s primary targets
  • US/China trade dispute is the unsettling background

The Reserve Bank of Australia will announce its decision on the cash rate at 2:30 pm AEST am in Sydney, Australia, 4:30 am GMT and 12:30am EDT Tuesday July 2nd.

RBA: A new easing cycle

The RBA’s second rate cut in as many months, and together the first in almost three years are likely to be followed by others as the bank tries to stimulate the Australian economy in the face of ebbing domestic and global growth.   

Governor Phillip Lowe had previously said that April’s 5.2% unemployment rate which continued into May and declining GDP indicated that little impact is being made on the extra capacity in the labor market. Unemployment has risen from 4.9% in March which was an eight year low.


Australian annual GDP averaged 2.9% in 2018 but has been on a steady down path for nine months. From the second quarter high of 3.4% it dropped to 2.8% in the third, 2.3% in the fourth and 1.8% in the first three months of this year.



Inflation has also stayed stubbornly low having fallen from 1.9% year over year in the first and second quarters of last year to 1.6% in the first period this year.


Central Bank Uniformity

Every major central bank has joined the lower rate procession.

The RBA and the RBNZ have cuts rates. The Federal Reserve is widely expected to do so at the end of this month having moved to an easing bias in June. The Bank of England said at its last meeting that rates could now move either way, which might seem equivocal but it replaces a tightening policy. The ECB President Mario Draghi said last month that the bank could cuts rates or provide other liquidity should it become necessary. The bank’s main refinance rate is already at zero. But even if the ECB governors move to a negative main rate they would not  be the first, the Bank of Japan’s overnight call rate has been at -0.1% for more than three years.

Zero rates: economic logic vs. empiricism

In the aftermath of the financial crisis the world’s central banks adopted a monetary policy of, in Mario Draghi’s famous words, “Whatever it takes.” He was referring to preserving the euro but in order to save the euro he needed to save the European economy, hence zero rates. 


For central bankers and their institutions who are often viewed as careful custodians of their economies the policy choices are surprisingly few. In fact they are not few but one: interest rates.

The response to the financial crisis and recession was uniform reduce rates as far and as fast as possible and by whatever means necessary.

But the bankers soon found that getting lower was not the same as being lower. The stimulus effect of bringing rates to below 1% was not the same as keeping rates that low for long periods of time.

The economies operating under the supposed economic gift of extremely low rates did not accelerate, they continued along an indeterminate path, moved higher and lower by other factors largely ignoring the historically miniscule cost of funds.  Low rates became the background against which the industrial economies conduced business, a background that the bankers were fearful to change lest they precipitate a recession.  Rates at the zero bound had lost their ability to promote economic growth and the bankers had lost their confidence that their economies could function without them.  

Only the US Federal Reserve, the originator of quantitative easing, acted to return rates to a more normal environment. Throughout the three year effort to raise the Fed Funds upper target rate from 0.25% to 2.5% none of the traditional catalysts for a tightening campaign, rising inflation and wages and an overheating economy were present.  The Fed governors persisted and now that the world’s central bankers are again worried about preserving growth, the Fed has more ability to effectively stimulate the US economy than any other industrial nation’s central bank.

The RBA may lower its cash rate to 1% and beyond. But the problems of the Australian economy do not stem from a restrictive monetary policy.

Perhaps the RBA governors should ask the Bank of Japan about efficacy of interest rates below 1%. Japan first instituted them more than 20 year ago. They are still in place.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Forex Analysis

Editors’ Picks

EUR/USD pressured around 1.13 after jump in US jobs

EUR/USD is trading around 1.13, down after US Non-Farm Payrolls shocked with a leap of 2.5 million jobs in May, contrary to all projections. The greenback is gaining while stocks are falling, a correlation breakdown. ECB stimulus previously supported the euro.


GBP/USD retreats from highs

GBP/USD is trading below 1.27, off the highs. The pound is struggling after Chief EU Negotiator Barnier reported little progress in Brexit talks. Robust US jobs support the dollar.


Gold sees weekly closing below $1700 - a caution for bulls

The steady decline in Gold prices (futures on Comex) accelerated on Friday, as the rates closed the week below the 1700 mark for the first time in three weeks at 1688.35. A weekly closing below the key 1700 level is unlikely to bode well for the bulls.

Gold News

Institutional demand exceeds Bitcoins supply

Greyscale floods the market with fresh money to satisfy the demand of its clients. Investors, willing to pay a 29% surcharge for exposure to Bitcoin without suffering the legal and operational inconveniences. Market remains at risk on the verge of new bullish territory.

Read more

WTI rallies above $39 as focus shifts to OPEC+ meeting

Crude oil prices built on Thursday's modest gains and rose sharply on Friday boosted by the upbeat market mood optimism surrounding Saturday's OPEC+ meeting. 

Oil News

Forex Majors