Interest rates cut to record low of 0.75pc

Angus Livingston, AAP National Economics Writer
(Australian Associated Press)

 

Australia’s interest rates have dipped below one per cent for the first time, but the Reserve Bank is already preparing to cut them further if the economy remains stagnant.

The new record low of 0.75 per cent is the third cut this year, as the central bank tries to push the unemployment rate down and inflation and wage growth up.

The Commonwealth Bank was the first of the big four banks to trim its interest rates in response to the RBA’s move.

However, while CBA cut its standard variable rate for home loan customers by between 0.13 and 0.25 per cent it did not match the RBA’s cut completely.

The other big banks are expected to follow CBA’s lead in the coming days.

The RBA said in astatement that the economy still had spare capacity and lower interest rates would help make inroads into that.

“The board … 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,” the RBA said.

AMP chief economist Shane Oliver said the Reserve Bank’s work isn’t done.

“They want to get the economy humming faster, I don’t think this will be enough – it will help (though),” he told Sky News.

He predicted rates will drop again to 0.5 per cent on Melbourne Cup Day, and down to 0.25 per cent early in 2020.

Treasurer Josh Frydenberg said the RBA cut rates to bring Australia into line with other low-rate economies, as well as to pursue its goals of cutting unemployment and lifting wage growth.

“The board has made clear in its statement today the domestic economy has reached a gentle turning point and they positively referred to the benefits that are flowing from the tax cuts, which are the most substantial in more than two decades,” he told reporters in Sydney.

But Labor shadow treasurer Jim Chalmers said the government was pretending it had no options to lift the flagging economy.

“If they were so good at managing the economy the Reserve Bank wouldn’t have had to cut rates again today,” he told reporters in Brisbane.

Deloitte Access Economics partner Chris Richardson says there are downsides to cutting rates so low.

“There is a risk that we’re spending down our recession insurance,” Mr Richardson told Sky News before the cut was announced.

Mr Frydenberg said the best way to avoid recession in a future global downturn was to pay down debt, giving the government more capacity to spend through it.

The Australian Chamber of Commerce and Industry urged the banks to pass on the rate cut in full to lift spending on retail.

“Small businesses have been doing it tough over the past year. This has particularly affected discretionary spending in small retail businesses, including cafes and restaurants,” chief executive James Pearson said.

The RBA said wage growth remains subdued and there is little upward pressure, 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,” the bank said.

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

The low wage growth means Australia hasn’t met the RBA’s inflation targets, leaving the national economy stagnant.

The RBA says signs of a turnaround in the Sydney and Melbourne housing markets are promising, but new building activity has weakened and growth in housing credit remains low.

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