RBA cuts again and leaves room for more

Stuart Condie
(Australian Associated Press)


The Reserve Bank of Australia has cut the cash rate to a fresh record low 1.0 per cent and left the door open for another cut before Christmas if its second straight monthly reduction fails to boost the economy.

The first consecutive 0.25 percentage point cut since 2012 had been widely anticipated by the market after RBA Governor Philip Lowe had suggested one alone would not be sufficient to boost economic growth.

Dr Lowe on Tuesday said the reduction in the cost of bank borrowing was a response to global trade uncertainty and low wage growth, which is keeping inflation below the two-to-three per cent range the RBA believes supports healthy economic growth.

But he repeated the advice of last month that the RBA board would closely monitor the labour market for signs that further policy adjustments were needed, which some economists took as further evidence that another cut looms.

“The board emphasised employment growth and the need to stimulate wages growth and therefore price inflation, with an explicit mention of the need to move inflation into the two-to-three per cent target band over the medium term,” BIS Oxford Economics chief economist Sarah Hunter said.

“We don’t think the 50 basis-point reduction will be enough, and continue to expect a third cut to 0.75 per cent in the fourth quarter.”

NAB market economist Kieran Davies flagged November as the likeliest time for a cut, while RBC Capital Markets and Capital Economics were among those tipping a rate of 0.5 per cent some time next year.

Last month’s cut – the first move in any direction since August 2016 – came a day before the release of another disappointing quarterly GDP result and 10 days before unemployment was shown to have remained unchanged at an unsatisfactory 5.2 per cent.

Australia’s economy grew by an underwhelming 0.4 per cent during the March quarter as household spending weakened and the property construction downturn rolled on.

Dr Lowe on Tuesday noted that, with wage growth still stubbornly low, the outlook for household consumption remained uncertain.

“Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices,” Dr Lowe said, although he did acknowledge “some tentative signs that prices are now stabilising in Sydney and Melbourne”.

The US-China trade tariff dispute was a major headwind, he said, but resulting expectations of easing monetary policy by major central banks lowers the cost of funds for Australia’s major banks.

This would normally ease lenders’ path to passing on more of the latest rate cut to borrowers in the form of lower interest rates.

“Bank funding costs in Australia have … declined, with money-market spreads having fully reversed the increases that took place last year,” Dr Lowe said.

Lenders across the market trimmed mortgage rates after the RBA’s last move and some smaller outfits moved swiftly to do so again on Tuesday.

But two of the four big banks failed to pass on the full June rate cut to customers and, by 1615 AEST, only ANZ had moved its variable rates in response to the latest cut.

This time, ANZ passed on the full amount.

Product comparison site Canstar says big banks have, since 2011, passed on only 50 per cent of rate cuts in full.

Rival Mozo estimates that, by holding back some of the official interest rate cuts since 2016, big four banks have pocketed approximately $3.96 billion in additional revenue.

A lower cash rate also means a lower return for savers, with interest rates barely keeping pace with underlying inflation that Dr Lowe said on Tuesday would be about 2.0 per cent in 2020 “and a little higher after that”.

The Aussie dollar spiked down from 69.79 US cents to 69.60 US cents on the announcement before recovering to sit at 69.80 US cents at 1615 AEST.


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