Interest rates slashed to record low 1 per cent

The Reserve Bank of Australia has cut official interest rates to 1 per cent, the lowest level on record, as it tries to boost the economy enough to drive down unemployment and lift wages.

Following its monthly board meeting in Darwin, the first time it has met in the Northern Territory capital since 1968, RBA governor Philip Lowe revealed the bank would slice the cash rate by 0.25 percentage points for a second consecutive month.

Reserve Bank of Australia governor Philip Lowe said the economy had grown below trend over the past year.Credit: Alex Ellinghausen

It is the first back-to-back cut in interest rates since 2012.

ANZ was the first of the big four banks to pass on the cut in full.

Dr Lowe said the economy had grown below trend over the past year, with household consumption "weighed down by a protracted period of low income growth and declining housing prices".

While employment growth had been strong, there had been little inroads made into the economy's spare capacity, which meant overall wages growth "remains low".

"A further gradual lift in wages growth is still expected and this would be a welcome development," he said.

"Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment."

Dr Lowe said there were some tentative signs that house prices in Sydney and Melbourne had stabilised, pointing out that mortgage rates were now at record lows.

But he gave no signs that this was the last cut by the RBA in this current cycle.

"Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy," he said.

"It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target."

The Australian dollar dipped from 69.79 US cents to 69.70 US cents following the announcement before climbing back to 69.81 US cents by 1435 AEST.

Ahead of the decision, markets had put the chance of a rate cut on Tuesday at 77 per cent, with another cut priced in by February next year.

If passed on in full, the quarter percentage point cut would save $58 a month in repayments on a $400,000, 30-year mortgage.

But analysts are sceptical about whether banks will be able to pass on all of the reduction due to the impact it would have on their deposit rates, which in many cases would approach zero.

KPMG chief economist Brendan Rynne said the move to 1 per cent put pressure on the Morrison government to consider other ways to boost the economy.

"The RBA is sending a signal to the market, to 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," he said.

"So this really puts the onus on the government to bring forward fiscal stimulus – by getting new targeted infrastructure projects up and running and ensuring the proposed tax breaks are brought into law soon as possible."

Figures from property analysts CoreLogic this week showed dwelling values lifting in Sydney and Melbourne through June, the first increase in the two cities since 2017. However, values fell in almost every other capital city.

CoreLogic research analyst Cameron Kusher said the cut in the cash rate had little to do with current housing market conditions.

He said banks were unlikely to pass on all of the reduction while there were also headwinds from the new banking code of conduct and the expansion of the comprehensive credit reporting program.

"Given this, the expectation is that a recovery in housing market conditions is likely to be slow and gradual despite lower interest rates," he said.