Interest rate cut a confidence boost for households but business leaders remain cautious

The Reserve Bank’s interest rate cut has been welcomed but business leaders warn that cost-of-living issues persist and more radical measures may be needed.

The Reserve Bank on Tuesday cut the cash rate by 25 basis points, the first cut since November 2020. Picture: NewsWire / Gaye Gerard

Last week’s interest rate cut was a confidence boost for households but business leaders and economists have cautioned it will not be a silver bullet to stop falling living standards, while calling for structural economic change.

The Reserve Bank on Tuesday cut the cash rate by 25 basis points to 4.1 per cent, with financial markets pricing another two rate cuts by December.

While business chiefs supported the RBA’s move, they cautioned economic uncertainties persisted and government policy would be critical in the upcoming federal election.

Wesfarmers chief executive Rob Scott said he expected cost-of-living pressures and higher business costs to persist, despite the likelihood of further interest rate cuts.

Escala Partners vice-chair Chris Selby said it was “a little early” to tell whether it would give people confidence to buy or invest more, with the federal election now in focus.

AMP chief economist Shane Oliver said it was more important to address falling living standards, which would figure strongly in the coming federal election.

“There’s a lot more that can be done and that’s what the coming election debate should be about,” he said. “We’ve had a huge deterioration in living standards due to a surge in inflation.

“But an underpinning factor to that is the weak productivity growth in Australia. We are not growing our output in relation to our hours we work as quickly as we used to and that’s leading to depressed living standards.

“The best way to do change that is reduce red tape or regulation, lower taxes, lower government spending and make sure there’s plenty of competition in the economy and that our eduction system is top notch.”

AMP chief economist Shane Oliver. Picture: Facebook / AMP

Mr Scott conceded that while inflation in Australia was ­moderating from the highs seen in the wake of the Covid-19 pandemic, there were still threats to the economy, consumers and ­businesses. They ranged from geopolitical risks to tariffs, a tight housing market and the weak Australian dollar.

“Economically, I would say we are not out of the woods yet,” said Mr Scott, whose company owns retail giants Bunnings Warehouse, Kmart, Target, Officeworks and Priceline.

“We need to be very mindful of some of the ongoing inflationary pressures that we are seeing. “The other points I would add to that would be that the decline in the Australian dollar will have an inflationary impact on a lot of the imported products that come into the country, so that’s yet to flow through. We should just be mindful of the uncertainty that exists.”

NAB chief executive Andrew Irvine said the RBA decision could have an “outsized” impact on confidence but cautioned there was still pain in the economy.

Meanwhile Dexus chief executive Ross Du Vernet said it was a “pivotal moment” in the real estate market and conditions for an office market recovery were emerging.

Inghams chief executive Andrew Reevesnow said the start of interest rate cuts should reduce cost-of-living pressures for households and help boost sales at fast-food chains, pubs and clubs.

“This week’s interest rate cut, while not huge in itself, is hopefully going to have a positive impact on consumer sentiment, and if we are at the start of an easing cycle, that should be positive for sales in the outlook,” he said.

Wesfarmers chief executive Rob Scott.

According to a report by global consulting firm McKinsey, labour productivity in Australia has not increased since 2016, making the nation the sixth-worst performer out of wealthy OECD economies over the past seven years.

It said for the three decades before the pandemic, productivity contributed more than 80 per cent of income growth, but Australia’s productivity growth has since dropped to 30th out of 35 rich countries.

Dr Oliver said since the Hawke-Keating and Howard-Costello governments there had been no major economic reform to boost productivity.

“Basically if people want better living standards we need to make is easier for companies to produce things and not over-encumber the economy with too much public-related activity,” he said.

Another two to three rate cuts over the year would save mortgagees thousands of dollars.

The last time the RBA cut interest rates was in November 2020.

With major banks passing the whole cut on, an owner-occupier with a $600,000 debt and 25 years remaining could see their minimum monthly repayments drop by $97, while repayments on a $750,000 mortgage would fall by $122 a month.

Chief economist of credit reporting agency CreditorWatch Ivan Colhoun said the 25 basis points were not going to make a “huge difference” and he expected another one or two cuts this year.

“You don’t use interest rates to tackle the cost of living. They’re used to manage the economy and inflation,” he said. “But I don’t think productivity is the biggest issue. The election is not going to be about productivity. It’s going to be about the cost of living.

“This week’s 25 basis point rate cut to 4.1 per cent, the first in five years, will benefit both consumers and businesses. Despite these positive developments, and a moderation in the rate of inflation, the cost of living for consumers, and of trading for businesses, has not dropped.

“This will therefore continue to be a pressure for many and is expected to keep insolvencies near recent highs in the near term.”

Originally published as Interest rate cut a confidence boost for households but business leaders remain cautious