Reserve Bank cuts rates for a second time in two months

The RBA has reduced the official cash rate to 1 per cent in another attempt to kickstart the economy.

Reserve Bank Governor Philip Lowe has been hinting at the need for further rate cuts. Picture: AAP

The Reserve Bank of Australia has delivered a second interest rate cut in two months, reducing the official cash rate to a record low of 1 per cent in another attempt to kick start the economy and drive unemployment lower amid a deteriorating outlook driven by a global trade spat.

The 25 basis points reduction marks the first time the RBA has delivered back-to-back interest rate cuts since 2012. It was widely predicted, with the chance of a cut rising to be rated earlier today as high as 85 per cent.

The Australian dollar recovered from a minor slip following the news, last trading 0.14 per cent higher for the session, at US69.76c, after touching US69.71c earlier in the day.

Meanwhile, the local sharemarket cheered the cut, jumping to within reach of its recent 12 year high. On the S&P ASX200, stocks were up as much as 0.5 per cent to 6686.5 following the RBA’s decision.

In the statement accompanying the RBA’s decision, issued after its historic meeting in Darwin, RBA governor Philip Lowe indicated rates could be pushed even lower if the jobless rate didn’t fall fast enough, and if wages and inflation did not rise to within the RBA’s target range.

However, he said the expected pick-up in household disposable income – largely due to the anticipated gradual increase in wages growth and from the government’s promised personal income tax cuts – was “expected to support spending” and help lift consumption.

Dr Lowe also made a veiled plea to the banking sector to pass on the savings to borrowers, noting that “bank funding costs in Australia have also declined” and that “money market spreads” had “fully reverse the increases that took place last year”.

Ahead of Tuesday’s rates decision, Treasurer Josh Frydenberg issued a message to financial institutions: “We do expect the banks to pass on in full to the Australian people the benefits of sustained reductions in their funding costs,” he said.

The RBA cut rates in June and despite “jawboning” from the treasurer, ANZ and Westpac last month attracted criticism for not passing on the full rate cut to borrowers.

In the wake of the RBA’s latest cut, non-bank lender Resimac beat the big banks to any rate cut announcements , saying on Tuesday it would reduce variable rates on its prime and specialist mortgages by 25 basis points.

The major banks had last year increased rates out-of-cycle with the RBA, citing higher funding costs on the short-term money market, but failed to reduce rates when those costs dissipated.

“At the current average variable home loan rate of 4.12 per cent, the monthly repayment for owner occupiers paying principal and interest is $1937,” CHOICE spokesman Tom Godfrey said. “If lenders pass the RBA cut on in full, the new average variable rate will be just 3.87 per cent and monthly repayments would drop to $1880,” he said.

Opposition treasury spokesman Jim Chalmers said the RBA’s move bolstered the case for Labor’s proposal to drag forward the government’s timeline for personal income tax cuts.

“It’s time for the government to do its bit and support Labor’s amendments which would see every Australian worker receive a tax cut in this term of Parliament,” Mr Chalmers said.

Dr Lowe said the main domestic economic uncertainty continued to be the outlook for household consumption, responsible for 60 per cent of Australia’s GDP, but which has declined amid the sliding national housing market. The RBA said signs that house prices were starting to bottom out in Sydney and Melbourne were welcome.

Chairman of real estate group Brian White said the interest rate cut would “provide a further shot in the arm to the property market and will instil even more confidence” following the Coalition’s victory in the federal election.

“We’ve already seen a noticeable change in the atmosphere in the last few weeks with increased inspection numbers and people more willing to raise their hand at auctions again,” Mr White said on Tuesday.

Dr Lowe said cutting rates to a new record low would “assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target” and that the central bank would “continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy” and a rise in inflation over time.

Despite new figures showing the housing markets in Sydney and Melbourne starting to recover, the property downturns in Perth, Darwin and regional parts of Western Australia are showing no signs of abating.

The RBA’s meeting comes just days after the Bank for International Settlements — the central bank for central banks — warned governments to stop relying on lower interest rates to drive economic activity, and instead to embark on difficult but necessary structural reforms.

Rates set to get lower

A number of economists at the major lenders expect the official rate to fall to as low as 0.75 per cent by the end of the year in an attempt to drive the unemployment rate down to about 4.5 per cent from its current level of 5.2 per cent.

Dr Lowe last month denied June’s decision to cut was a response to a deteriorating economic outlook since the RBA’s May meeting, but also noted that a 5.2 per cent unemployment rate and stubbornly low GDP growth indicate that few inroads are being made into the economy’s spare capacity.

Figures out last month showed Australia’s economy grew by an underwhelming 0.4 per cent during the March quarter as household spending weakened and the property construction downturn rolled on.

The latest easing of monetary policy came after the central bank confirmed it revised up its estimate of spare capacity in the labour market and officials indicated that further easing would be needed after they cut the cash rate in May, the first chance since August 2016.

RBA Assistant Governor Luci Ellis said last month that it had become apparent that the unemployment rate that Australia can sustain is lower than it has been in at least the past 40 years.

Moreover, she said, the bank’s official estimate of the so-called non-accelerating inflation rate of unemployment was about 4.5 per cent, rather than 5 per cent previously estimated.

“It would be “unrealistic to expect that lowering interest rates by a quarter of a percentage point will materially shift the path we look to be on,” Dr Lowe said in a speech last month.

“The most recent data – including the GDP and labour market data – do not suggest we are making any inroads into the economy’s spare capacity. Given this, the possibility of lower interest rates remains on the table.

“It is not unrealistic to expect a further reduction in the cash rate as the board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target,” Dr Lowe said.

The renewal of interest rate cuts have come amid persistently below-target inflation, a sharp slowdown in domestic and global economic growth since mid-2018 – exacerbated by US-China trade tensions - and a tightening of credit conditions that may worsen Australia’s biggest housing market correction since the early 1980s, even though sentiment has improved since the federal election.

Financial markets have scrambled to predict earlier and larger interest rate cuts in recent weeks. The money market was fully expecting a second cut to 1 per cent by August and a third cut to 0.75 per cent by November.

The market-implied chance of a fourth official interest rate cut to 0.5 per cent by February was about 80 per cent.

A number of economists have also predicted the cash rate will get to 0.5 per cent in the year ahead.

If it needs to further stimulate the economy from that point, the RBA is expected to consider quantitative easing.