Fears RBA rate cut could do more harm than good
Australia’s central bank is expected to cut the cash rate as the national economy struggles. But experts warn such a move could have consequences.
Economy
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Consumer confidence could be dealt a massive blow if the Reserve Bank cuts official interest rates to a record low at its next board meeting, leading economists have warned.
With the Reserve Bank expected to cut the cash rate to 0.75 per cent to boost the economy and combat rising unemployment, the board has been warned that it needs to do a better job to explain its decisions to the public, The Australian reports.
Economists believe that by cutting rates to a record low, the Reserve Bank will are worried the rate cuts are doing more harm than good by scaring already-nervous consumers into shutting their wallets.
“The Reserve Bank is cutting for two reasons: one is because the economy is weaker and the other is that it is harder to get inflation rising,” said Deloitte Access Economics principal Chris Richardson, according to The Australian.
“Inflation is the bigger of the two things fussing the Reserve Bank at the moment, but it’s the thing Mr and Mrs Suburbs have trouble understanding.
“The RBA risks being their own biggest enemy by worrying people too much with the rate cuts, which are contributing to weakening consumer confidence and leaving consumers more worried that they should be.
“I have no problem with the RBA cutting rates on Tuesday and probably again in February, but it’s up to the bank to change the community’s understanding of why it is cutting rates.
“If rate cuts create 200,000 jobs and get wages growing again, that’s good news.”
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Consumer confidence took a dive after the RBA cut its official cash rate to 1 per cent in July. It continues to warn lower interest rates will not help the struggling economy as Treasurer Josh Frydenberg refuses to fast-track more tax cuts and infrastructure spending.
Mr Frydenberg and Prime Minister Scott Morrison have both called on the big banks to pass on any rate cut to borrowers. The Treasurer said on Monday that recent RBA cuts had helped stabilise the housing market.
“We’ve also seen prices rise after a period of consecutive months where they fell,” Mr Frydenberg said.
“As a government, we’re responsible for fiscal policy, and they’re (the RBA) responsible for monetary policy.”
The central bank warned last month that both back-to-back rate reductions and Scott Morrison’s $1080 tax rebates had failed to get Aussies to open their wallets as the economy recorded its slowest annual growth since the global financial crisis. The OECD also cut Australia’s economic forecast this year from 2.3 per cent to 1.7 per cent.
Up to 70 per cent of households were not reducing the amount they repaid on their loan after the RBA cut rates, according to data from the major banks.
Official figures released on Monday showed annual credit growth slipped to 2.9 per cent in August, marking the softest outcome since mid-2011. The rate was 4.5 per cent just one year ago.
“Credit growth was anaemic in mid-2019, with housing weak in the wake of the sharp downturn and with business hitting a soft spot around the time of the federal election,” said Westpac economist Andrew Hanlan, according to the Australian.
“Move forward to August and credit growth remains weak despite the lift in new lending for housing in response to interest rate cuts.”
Labor’s shadow treasurer Jim Chalmers said the government was sitting on its hands and “hopelessly and dangerously out of touch”.
“Interest rates are at record lows because the government has a political strategy but not an economic policy,” he said.
Originally published as Fears RBA rate cut could do more harm than good