RBA slashes interest rates to new record low

The central bank has cut the cash rate to 1.5 per cent as it desperately works to stimulate weak inflation.

Traders had been warming to the prospect of a cut as the week progressed. Picture: Chris Pavlich.

The Reserve Bank has cut rates to a new record low as it looks to spark historically weak inflation.

In its monthly statement this afternoon the central bank said it had decided to reduce the cash rate by 25 basis points to 1.5 per cent, its second such move this year.

The Commonwealth Bank was the first of the big banks to respond, passing on around half the cut to homeowners. The banking giant will trim variable rates by 13 basis points, although the decision was made more palatable to consumers with a surprise move to lift its term deposit rates.

It was followed by NAB, which passed on 10 basis points and also announced a jump in term deposit rates.

The Australian dollar struggled for direction in response to the RBA decision, with the central bank’s statement focusing mostly on recent moderation in house price growth and offering little insight into the future direction of policy.

Property price growth has bounced around of late, but a cooling trend was shown in fresh numbers this week that highlighted expansion at its gentlest pace in almost three years, leaving the door open to RBA action.

“The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities,” RBA Governor Glenn Stevens said.

“Growth in lending for housing purposes has slowed a little this year.

“All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.”

The action follows a cut in May as the central bank desperately tries to address a 17-year low inflation rate.

Last week, June quarter numbers showed headline inflation at 1.1 per cent year-on-year, the limpest pressure on consumer prices since 1999.

The central bank said pricing pressures remained modest and dormant inflation was unlikely to be revived in the near-term.

“Recent data confirm that inflation remains quite low,” Mr Stevens said.

“Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.”

The commentary points to a chance of further action from the central bank this year, although Mr Stevens stopped short of offering any forward guidance.

“The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting,” he said.

Capital Economics chief Australian economist Paul Dales tipped further cuts from the RBA if it is eager to meet its 2-3 per cent medium-term inflation target.

“If it is going to weaken the Australian dollar to help solve its low inflation problem, the Reserve Bank of Australia may have to follow today’s interest rate cut with more cuts to 1 per cent sometime next year,” he said, adding such moves could drag the local currency down to US65c.

“Admittedly, the policy statement provided no hint that the RBA intends to cut rates further. [However] this is mainly because the RBA stuck to the protocol outlined in May 2015 that there would be no forward guidance at meetings when rates are changed.”

At this point markets are pricing in a 45 per cent chance of a cut in November, with little chance of a move seen before then.

Analysts had widely expected the cut from the central bank today, although the market had not fully priced in the decision, with the chances seen at 72.7 per cent earlier today.

Still, traders had been warming to the prospect as the week progressed, with the chances of a rate cut closer to 60 per cent near the end of last week.

Since then a weak US growth number – which pushed the Australian dollar sharply higher – had raised the prospects for action by the RBA, which has previously noted the threat of a rising currency to the economy’s non-mining recovery.

Economic data out today furthered the case as a widening trade deficit and slumping building approvals pointed to softer second quarter growth.

The central bank, for its part, said the local economy was growing at a “moderate pace”, a slight change in tune from the prior month when the RBA simply alluded to growth “continuing”.

Mr Stevens also said labour market indicators remained “mixed” but consistent with a “modest pace of expansion” in employment.

The RBA maintained the view the economy was making the required adjustments to transition out of the mining investment boom, although it again warned an advance in the value of the Australian dollar could “complicate” the economic shift.

Offshore, the central bank retained a view conditions were improving for most advanced economies, while also pointing to improved conditions in China as policymakers support the “near-term growth outlook”.

Mr Stevens said the underlying pace of growth in Australia’s key trading partner still appeared to be moderating, however.

At 4.05pm (AEST), the Australian dollar traded at US75.45c, up from US75.4c just prior to the announcement. It fell as low as US74.91c before bouncing through late afternoon trade.

Similarly, stocks made a sharp reactionary move higher before settling marginally below where they were prior to the RBA decision.

IG chief market strategist Chris Weston said the muted reaction pointed to traders betting big on a cut prior to the meeting.

“The reaction in the market has quite interesting and while the implied probability of a cut today stood around 70 per cent, it seems the bulk of speculative currency traders were positioned for the move lower,” he said.

“The lack of forward guidance in the last paragraph has also been noted, but traders will be watching for any signs this could be replayed in this Friday’s Statement on Monetary Policy.”