The official cash rate is likely to fall to 1 per cent or lower as a lack of fiscal policy from the government places the onus on lifting demand on a weaker currency and the RBA, Macquarie says.
In a bearish note, the investment bank's head of economic research James McIntyre says that without government policy support - backed by a global fiscal boost, or substantive structural reforms in key trading partners such as China - the RBA will be forced to cut rates further as it fights disinflation.
"With weak income growth a demand boost is needed. A weaker currency or fiscal policy boost are the two available options," Mr McIntyre said.
"The recent budget projected continued fiscal consolidation and only forecast a modest contribution to growth from public demand."
Wage growth hit an 18-year low in the March quarter, Australian Bureau of Statistics data showed this week.
Government support appears unlikely, and the currency is unlikely to fall on its own because global investors are drawn to the Australian dollar for its relatively high returns, given the ultra-low interest rates worldwide.
The RBA will therefore be forced to slash the cash rate to 1 per cent - a 75 basis point fall from its current record low of 1.75 per cent - or lower to keep a lid on the currency. It may have to cut even further to push the Aussie low enough to lift domestic demand, Mr McIntyre said.
"The decline in the Australian dollar has helped to improve Australia's competitiveness whilst sustaining nominal price levels in the economy – although wages are adjusting lower," he said.
But a further fall in the local currency to around US65¢ is necessary to assist the economy's adjustment beyond trade services, he said. The dollar is currently buying around US72¢.
Mon 27 May 2019 AAGB/US- Holiday Tue 28 May 2019 A 14:00 US- Consumer Confidence C 13:00 US- Case-Shiller Wed 29 May 2019 A 08:55 DE- Employment AA 18:00 US- BOC Decision A 18:30 US- EIA Crude Thu 30 Mar 2019 AAEZ/CH- Holiday A 12:30 US- Weekly Jobless Fri 31 Mar 2019 AA 10:00 EZ- Flash HICP A 12:30 US- Personal Income, Spending, Deflator AA 14:00 US- Final Univ of Michigan
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