Hot on the heels of a prediction that RBA interest rates will be at 0.75% by the end the year, JP Morgan thinks it could be 0.5% in a year from now.

The Reserve Bank of Australia is Australia’s central bank. One of its biggest roles is to decide Australia’s interest rate, taking into account economic conditions including unemployment, inflation and the housing market. The RBA interest rate has a ripple effect across the whole economy.

Why Is JP Morgan So Pessimistic?

The Australian Financial Review has reported that JP Morgan believes the RBA will need to take more drastic action to defend against a more severe global economic downturn than some are predicting.

One of JP Morgan’s economists, Sally Auld, was quoted by the AFR as saying: “We think the call for a terminal cash rate of 0.5 per cent makes sense given the cyclical and structural backdrop for the Australian economy.

We can’t be definitive that 0.5 percentage points is the effective lower bound for the policy rate in Australia. It may well be lower, and we suspect policymakers are open-minded about this possibility given the experience in other developed market economies.”

One of her other concerns is that because the rate of inflation is so low it makes the current interest rate look too high.

Why The Negativity?

On the one hand we are hearing that Australia is about to go through a recovery phase for the economy as a result of the election win by the Liberals, APRA’s proposed change and so on.

However, on the other hand economists are talking about the need for Australian rates to be lower.

In my opinion an interest rate reduction is not a clear win for the economy. It becomes much harder to raise the rates again, as we’ve seen in the US. It also punishes savers and encourages people to take on debt. I don’t like that, as much as it might benefit the big banks like Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC).

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.