Judging whether the economy is showing signs of improvement is a difficult call at present with parts of the economy experiencing recession, but other parts growing reasonably well, notably the export services sector. Housing activity has been very strong but may be topping out. Household consumption expenditure is growing, but not particularly strongly and faces constraint from low growth in wages. Employment is growing, but not enough to bring the unemployment rate down and the unemployment rate remains high enough to indicate plenty of excess capacity. Meanwhile inflation is declining and looks like staying low for some time.

The RBA judged there were enough signs of improvement in the economy to cope with the small tightening of monetary conditions delivered by banks lifting their home loan interest rates and to not need the RBA delivering a cash rate cut. However, the RBA noted that lower than expected inflation afforded the ability to cut rates further if demand in the economy shows need of some support.

We believe the line is much finer whether demand needs more support than the RBA implied in its comments in its quarterly Monetary Policy Statement. Even the changes to the RBA’s own economic forecasts hardly tally with its relatively upbeat comment. The signs of improvement in economic activity, the RBA referred to over recent months do not seem to tally with a GDP forecast for end 2015 revised down by a quarter percentage point to 2.25% y-o-y from 2.50% three months earlier. That says to us that the near-term economic growth outlook has actually worsened a little.

The downward revisions to the RBA’s inflation forecasts are even more pronounced. The end-2015 headline CPI inflation forecast is revised down to 1.75% y-o-y from 2.5% in August, while the underlying inflation forecast is revised down 2.0% y-o-y from 2.50%. Those are some of the biggest downward revisions the RBA has ever made and certainly imply that low inflation provides plenty of scope to lower interest rates further.

The issue is what will it take to push the RBA over the line to cut the cash rate further? From the RBA’s comments, slippage in business sentiment surveys plus signs that employment growth is slipping and the unemployment rate rising. A soft Q3 GDP reading in early December might influence the RBA to cut as well, but the first opportunity to react to that would be February next year.

We doubt that enough information will be available to shift the RBA towards a rate cut at its next meeting on December 1st. As RBA Governor Glenn Stevens pointed out last week any near-term cash rate move will almost certainly be a cut. We still think a rate cut or two will come in the first half of 2016, taking the cash rate down to 1.50%. At this stage we pencil in 25bps cuts for February and March 2016.

Whether the RBA chooses to cut the cash rate further what we can say with some certainty is that the cash rate will be no higher than the current 2.00% for some time. On the RBA’s latest economic forecasts where it sees GDP growth no higher than 3% through to late 2016 and inflation inside target band through to end-2017, the cash rate looks set to be 2.00%, or lower through all of 2016.

With the cash rate anchored at 2.00%, even if key overseas interest rates climb a little as say the US Federal Reserve starts to gradually lift its funds rate, there is still good reason that longer-term interest rates in Australia will rise less than their overseas counterparts. In short, a low interest rate environment looks set to persist in Australia for some time. If anything, the RBA becoming more data-dependent rather than pro-active in setting the cash rate also runs the risk that economic growth and inflation are lower than otherwise would be the case, another reason to expect interest rates to stay lower for longer.