In what was a well telegraphed move, the RBA cut the official interest rate today to 0.75% citing weaker than expected growth in the domestic economy and global uncertainty.
The RBA made the following comments:
“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 .
“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”.
And some lenders have already starting slashing variable rates but it’s going to take more than a rate cut or two to restimulate our economy
In my mind the government now needs to implement reforms to drive long-run growth.
The two rate cuts we’ve already received plus the tax refunds many Australians have enjoyed haven’t translated to increased consumer spending.
However they have had an impact on our property markets with rising property values around Australia.
But these rate cuts will take one to two years to flow through the economy and boost the inflation rate and lower the unemployment rate. It’s likely that rate cuts will have a smaller impact than in the past: interest rates are already at historically low levels, banks will likely pass on only part of future cash rate reductions, Australians are heavily indebted, and businesses remain hesitant to invest due to the uncertain global economic outlook.
Here’s what the experts have to say:
Martin Lakos ( Macquarie) comment:
At its meeting this month, the RBA decided to cut official interest rates by 0.25% to 0.75%, a new historical low.
It’s now widely expected that the RBA will cut rates again. Macquarie gauges the RBA will now pause, having halved the cash rate from 1.5% in May and will cut a further 0.25% in February next year.
Assuming a further rate cut to a new low of 0.5% in 2020, Macquarie sees Australia’s growth recovering slowly from 1.4% currently, to 2.5% by the end of 2020.
Comments from Tim Lawless:
Recent evidence of a strong rebound in Sydney and Melbourne housing values wasn’t enough to stave off a rate cut, with the RBA opting to slash interest rates further to a new record low.
A trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA’s decision to cut rates to a new low, as well as concerns around persistently weak household spending, subdued wages growth and low inflation.
Lower interest rates together with a subtle loosening in credit policies and improved housing sentiment has seen national housing values recover 1.7% of the 8.4% peak to trough decline in value, with a substantially larger bounce in Sydney and Melbourne.
The rebound in housing conditions should help to support an improvement in economic conditions as higher housing prices translate to a wealthier and more confident household sector who will hopefully be inclined to spend more.
Stronger housing conditions should also support the residential construction sector where approvals dropped through the housing downturn.
Both household spending and residential construction activity have weighed on economic growth, so a turnaround in these sectors would be a welcome turn of events.
Although the housing recovery is likely to add to Australia’s economic momentum, it comes amidst record levels of household debt and ongoing affordability challenges.
There is a risk that lower interest rates could fuel a further rise in household indebtedness as housing credit picks up and investors once again become more active, while higher housing prices are likely to curb participation from first home buyers despite the lower cost of debt.
Comments from the RBA:
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.
CASH RATE DROPS TO 0.75% | Comments from the Finder.com.au RBA Survey:
RBA cuts: Cash rate heading to 0.50%
- After just two meetings of holding it at 1.00%, the Reserve Bank of Australia (RBA) today reduced the cash rate to 0.75%.
- In this month’s Finder RBA Cash Rate Survey™ – the largest of its kind in Australia – 45 experts and economists made their predictions, with 55% (25/45) correctly predicting an easing of the rate, citing recently released data on employment, retail sales and consumer sentiment.
- Graham Cooke, insights manager at Finder, said nearly three-quarters (72%, 26/36) of experts predicted that the cash rate will reach 0.50% before it starts to increase.
- “The RBA uses each cut like a defibrillator to zap the economy back to life but as the rate gets closer to zero, they are running out of options.
- “An injection of cash [quantitative easing] and the potential of a negative cash rate may be the only option to stimulate the economy.
- Cooke said that lenders are likely to pass on most, but not all of the 25 basis point rate cut if recent history is any indication.
- “From across the market, we’ve seen more than 8,700 loan products reduced since June 2019.
- “Some lenders have passed on the full 50 point reduction (from the June and July cuts), but most have not.
- “After today’s cut, you can expect to see more lenders offering variable rate loans that start with a ‘2’, so if yours doesn’t start with at least a ‘3’ it’s time to shop around,” Cooke said.
How much you could save
- Cooke said every cash rate cut is a blessing to borrowers and a stick in the eye to savers.
- “While many lenders may pass on a cut to their customers, you may not see the full 25 basis point cut applied to your loan.
- “Keep an eye on your lender’s website and digital channels to see how they are responding. If they aren’t passing on the cut, it might be time to go home loan shopping.
- “However if your lender passes on the full 25 basis point cut, an average mortgage holder could save $19,000 over 30 years on their mortgage.
Potential rate cut savings on different loan amounts
Sentiment for wage growth and employment at all-time low
- Results from Finder’s Economic Sentiment Tracker, which gauges five key indicators – housing affordability, employment, wage growth, cost of living and household debt – were split this month, with housing affordability seeing the best gains while wage growth sentiment dropped most dramatically.
- Introduced in March 2018, this month’s tracker set an all-time low for economic sentiment in wage growth (6%) and employment (14%), likely stemming from the August Labour Force data which revealed increases in the unemployment and underemployment rates.
- Cooke said these figures are both moving in the opposite direction than the RBA hoped.
- “The signs for Australia’s employment rate look grim, and because of that the potential for wage growth continues to look weak.
- “While we have seen a small increase in the number of jobs in the market, these are heavily dominated by part-time work.
- “All these signs point to more cuts on the horizon, and the RBA slowly running out of options,” Cooke said.
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