RBA has more work to do

The RBA’s interest rate cuts are running into diminishing returns as banks are protecting their net interest margins and loan demand remains muted. Meanwhile, the sluggish increase in retail sales in August suggests that households are saving rather than spending the income tax refunds that are now arriving in their bank accounts. We reiterate our forecast that the RBA will cut interest rates to 0.5% in December but the risks are growing that more stimulus will be needed.