RBA continues to cut rates with few options left to keep the economy going

RBA continues to cut rates economy interest Reserve Bank of Australia
The RBA has cut interest rates to a record low 1%.

The Reserve Bank has signalled it is absolutely determined to lift wages and push down unemployment by slashing official interest rates to an unprecedented 1%.

After a monthly board meeting in Darwin, RBA governor Dr Philip Lowe revealed the bank would slice the cash rate by a further 0.25% after cutting by the same amount last month.

Importantly, the RBA gave no indication that it had finished cutting rates yet, which is sure to stoke speculation that rates could be heading down further over the next six months.

“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” he said.

Aim to cut unemployment and boost inflation

“It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”

The first back-to-back monthly interest rate cuts since 2012 came as Dr Lowe said the Australian economy had been growing below trend for the past year, with household consumption “weighed down by a protracted period of low-income growth and declining housing prices”.

“A further gradual lift in wages growth is still expected and this would be a welcome development,” Dr Lowe said.

He said employment growth had been strong but there had not been enough inroads made into the economy’s spare capacity, which meant overall wages growth “remains low”.

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

Some room for optimism

The RBA board minutes weren’t all gloomy – they pointed out that there were some early signs that house prices in Sydney and Melbourne had stabilised, now that mortgage rates had fallen to record lows.

Initially the RBA decision sent the Australian dollar slightly lower to US69.70c but it promptly climbed back to US69.81c given that the rate cut had been widely anticipated by markets.

Only one of big four banks passes on full rate cut

Now the focus is back on the big four banks – only one of which has said that it will pass on the full 25 basis point cut to its home loan borrowers.

ANZ – which was roundly condemned for not passing on the full cut last time – is the only big bank to pass on the full 25 basis points to variable interest customers this time.

Westpac cut its variable rate by 20 basis points for owner occupiers and 30 basis points for interest only loans.

Commonwealth Bank and Westpac both cut their variable home loan rates by 19 basis points on their massive books of variable home loans.

The RBA’s double rate cut is designed to stimulate consumer spending by putting extra cash in home owner’s pockets, although the effect could be muted if banks withhold some of the rate cut.

A full cut would save the average homeowner with a $400,000 housing loan over 30 years $58 a month in repayments.

Bad news for savers and retirees

However, the rate cut is bad news for savers and retirees, with rates on deposits set to plummet even closer to zero, despite some conditional interest rate specials that the banks announced yesterday to soften the blow.

The rate cut puts more pressure on the Morrison government to follow more of the RBA’s suggestions to boost the economy such as increasing infrastructure spending and putting more cash in the pockets of workers.

BIS warns governments to act

Just this week the Bank of International Settlements (BIS), which acts as the world’s peak banking authority, warned that world governments should stop relying too heavily on cheap money to boost their economies, with a warning about the build-up of major financial threats from low interest rates.

In its annual review, BIS said politicians had to start making difficult but necessary structural reforms to avoid the dangers created by easy money.

BIS general manager Agustin Carstens said low interest rates might boost an economy in the short term but longer term they could cause major dislocations, especially with higher government and household debt levels.

“The plane cannot fly on one engine only; it has to ignite all four,” he said.

“We need a better balance between monetary policy, fiscal policy, macroprudential policies and structural reforms.’’

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