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The RBA just cut rates again to a new record low

- October 1, 2019 5 MIN READ
  • Australia’s official cash rate now sits at 0.75% following a 25 basis points cut
  • It’s the third rate cut since June amid growing concerns about a sluggish national economy
  • The Reserve Bank expects inflation to be a little under 2% 2020, rising to just above 2% in 2021
The Reserve Bank of Australia (RBA) has cut the official cash rate by 25 basis points to a record low of 0.75%, signalling that it’s prepared to cut again if the insipid national economy fails to respond to the third rate cut in four months.

The RBA previously cut rates by 25 basis points at its June and July meetings this year. It was the first change in the cash since August 2016.

Today’s decision was widely expected by markets amid rising local unemployment, stagnant wages and international uncertainty.

While trying to keep an optimistic tone, today’s statement on the decision by RBA governor Philip Lowe appeared far from rosy, hinting that the bank will make further cuts “if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target”.

The bank’s inflation target is 2–3%, and today’s statement expects inflation remain under 2% in 2020 before climbing into the band in 2021.

The Governor is banking on the RBA’s three cuts having the power to give the Australian economy the kick-start it desperately needs.

In the wake of the central bank’s dovish approach, AMP Capital chief economist Shane Oliver sees further cuts coming in November and February 2020, dropping the cash rate to 0.25%.
The market is now backing December for a further reduction, and again in the first quarter of 2020.
And Lowe remains concerned about the US-China trade war and technology disputes and their impacts on global trade, as well as business confidence to invest, expecting further rate cuts globally.

“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation,” Lowe said.

While Australian economic growth in the June quarter was weaker-than-expected at 1.4%, Lowe called in “a gentle turning point” compared to 2018 and believes the combination of tax cuts, infrastructure spending, lower rates and improved outlooks for housing and the resources sector bode well for improved growth.

The main domestic concern is household consumption, with stagnant wages growth weighing on consumer spending.

Lowe is upbeat about employment while nonetheless anticipating a slowing in the recent rapid growth rate .

“A further gradual lift in wages growth would be a welcome development,” he said.

“Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.”

Market reaction

Attention now turns to whether the banks will pass on the full cut to mortgage borrowers in full in a bid to stimulate a flagging economy.

While home prices have recently posted their largest gains since March 2017, dwelling approvals plunged to the lowest level since January 2013 and August’s figures on Australian housing credit growth were at a new low.

Among the first to respond was Athena Home Loans, the Sydney fintech startup launched earlier this year by two former-NAB bankers.

Athena is cutting its variable rate for owner-occupier principal and interest loans 2.84% per annum, and 3.24% p.a. for investors.

Meanwhile the local sharemarket rose on confirmation of the rate cut, while the dollar fell.

Australian Retailers’ Association executive director Russell Zimmerman, said he was hopeful the cuts would boost retail sales.

“We haven’t seen the jump in retail sales we were hoping for, and we are still waiting to see the flow-on effects of earlier rate cuts, tax cuts, and increases to the minimum wage,” he said.

“Retail trade figures in recent months have continued to lag but we keenly await the release of August retail trade figures to see whether the other stimulatory measures have kicked in.

“It’s no secret that retailers have been doing it tough, so we hope this decision sparks a sustained resurgence in retail spending in concert with the other stimulatory measures.”

But not everyone was pleased with today’s decision with Andrew Moore, CEO of the millennial super fund Spaceship, saying more than 1.8 million Australians are among the “big losers”.

“These forgotten Australians are the 55% of 25-34 year olds who don’t own property, and either live at home with family or are renting,” he said.

“They are typically savers rather than borrowers, and interest rate cuts lower the returns they receive. Lower interest rates favour borrowers but hit savers hard.”

Just after 5.30pm the Commonwealth became the first of the four major banks to announcement it would reduce home loan rates, with the standard variable rate falling between 0.13% and 0.25% for borrowers.

Here’s the Governor’s full statement following the decision:

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.75 per cent.

While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken further steps to support the economy, while continuing to address risks in the financial system.

Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.

The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome. A gentle turning point, however, appears to have been reached with economic growth a little higher over the first half of this year than over the second half of 2018. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.

Employment has continued to grow strongly and labour force participation is at a record high. The unemployment rate has, however, remained steady at around 5¼ per cent over recent months. Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate. Wages growth remains subdued and there is little upward pressure at present, with increased labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target. The economy still has spare capacity and lower interest rates will help make inroads into that. The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

 

 

 

 

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