Experts reveal big problem with tomorrow’s interest rate cut

The RBA is expected to announce a record rate cut. But experts argue it could leave the Aussie economy dangerously exposed.

If the experts are to be believed, an interest-rate cut is coming our way.

But those experts are also divided over whether that historic decision would be a good or bad thing.

The Reserve Bank board will meet this afternoon to discuss the cash rate, and after dropping some big hints, it seems all but certain it will slash the rate below its record low of 1.5 per cent, where it has been since August 2016.

Many expect that cut to be followed up by another later in the year, and some are also now suggesting a third cut is likely by the end of 2019 to help kickstart our slowing economy.

But most pundits agree that while it will be a win for individual homeowners and the housing market, it reveals a worrying clue about the state of the Australian economy.

And many also agree cutting interest rates now will leave the RBA with less chance of riding through a bigger economic hit in the future.

According to Chris Richardson, director of Deloitte Access Economics, the economy is in “mild” but not “desperate” need of assistance — and a cut now could weaken our ability to fight back against a serious economic threat down the track.

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Deloitte Access Economics director Chris Richardson says a cut could leave Australia exposed to future risks. Picture: Mick Tsikas/AAP

“Inflation is weaker than they thought, wage growth has stopped accelerating and there are signs of weakness in the economy, but on the flip side we already know big tax cuts are headed our way, APRA has loosened the noose on lending and some concerns about what policy changes might do to the housing market in particular have melted away,” he said yesterday.

“The cavalry is already rising over the hill for the Australian economy, so how much more help does it need?

“The Reserve Bank has at best three or four bullets left, and it’s pretty clear if it fires one tomorrow, and perhaps another one as soon as August, if a substantial challenge is thrown at the Australian economy at some stage, we run the risk of having no pitchforks left.”

Tech entrepreneur Matt Barrie, from freelancing marketplace Freelancer, agreed and said the cut would be a clear attempt to save Australia’s housing market, which was in “free fall”.

But he said cutting rates would leave the RBA with less “arrows in its quiver” to handle a future economic emergency — and questioned why the priority was to prop up the housing market, given prices were still seriously unaffordable for most.

Reserve Bank of Australia governor Dr Philip Lowe is tipped to announce a cut. Picture: Darren England/AAP

“Australian houses are still some of the most expensive in the world, household debt to income is at a record high and the banks are up to the gills in residential mortgages,” he said.

“You can’t cut very much from here and even so, we have core, structural problems with our economy that can’t be solved by cheap debt and stimulus — the problem is we don’t do much in this country any more.

“We dig up dirt and send it overseas, and we have immigration dressed up as education — but manufacturing is falling apart … and the economy is on par with Kazakhstan in terms of economic complexity.”

Meanwhile, realestate.com.au chief economist Nerida Conisbee said while a cut would help the real estate industry and those with mortgages, it also pointed at a possible deeper problem facing the country.

“The issue of course is that unemployment started to rise a bit in April, which is concerning, so while a cut will be good news, the reason why we’re getting one is not,” she said.

“One rate cut will provide a boost, two wouldn’t be too bad but if the Australian economy was in a situation where it required four rate cuts, it would be a situation where unemployment was rapidly rising, which would be very bad news.”

Realestate.com.au chief economist Nerida Conisbee says a cut is a good thing for people with mortgages — but could signal a problem with the economy. Picture: Supplied

And Australian Retailers Association executive director Russell Zimmerman said while a rate cut would likely boost the retail sector, especially with the recent minimum wage increase and tax cuts coming on July 1, it would be up to banks to ultimately pass those cuts on.

“By the time you add a rate cut plus the increase in minimum wage and the reduction in tax — provided that all goes through — we should see a bit more buoyancy in the economy,” he said.

“It’s probably fair to say if we see some easing of interest rates, the biggest issues will be if the banks actually hand those through. It’s fine to reduce rates, but we need banks to actually hand them through.”

KPMG Australia chief economist Dr Brendan Rynne said he had pushed for the RBA board to hold off reducing the cash rate before last month’s meeting because KPMG’s analysis shows monetary policy was “less effective in stimulating the economy when the cash rate is below 2 per cent compared to when it is above this level”.

He said growing global economic uncertainty — caused by factors such as the US-China Trade War, the Venezuelan crisis, Brexit, and Chinese debt — also indicated that the RBA “should keep its monetary policy powder dry until it truly needs to use it”.

“Clearly those issues haven’t changed in the past 30 days; indeed, some of the geopolitical risks have become more pronounced,” Dr Rynne said.

“But the call appears to have been made. And where the RBA decision does matter is in the signal it gives to the market, to the politicians and to the community at large, that the Australian economy is not firing on all cylinders, and as one of the guardians of national welfare, the RBA is looking to help out where it can.”

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