Reserve Bank cuts rates to two-year low amid concerns about global recession

Warning of weaker economic growth and a slide in business investment, Reserve Bank governor Michele Bullock has moved to deliver a quarter percentage point rate cut.

Reserve Bank governor Michele Bullock delivered a quarter percentage point rate cut. Picture: Nikki Short/NewsWire

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The Reserve Bank has rushed to cut the official interest rate by 0.25 percentage points and considered a half percentage point ­reduction, after downgrading economic growth and business investment forecasts on a weaker global ­outlook and a slide in household expenditure.

The central bank, which warned of an outside risk of recession in an extreme case of a Donald Trump’s trade war, lowered its forecast for its key measure of inflation – the underlying rate – to 2.6 per cent for this year, down from the previous estimate of 2.7 per cent, along with a modest rise in unemployment and weaker household spending growth.

After making its first cut in more than four years in February, the bank paused at its last meeting during the federal election, before cutting rates on Tuesday to 3.85 per cent.

RBA governor Michele Bullock said the board considered that the heightened uncertainty posed by the Trump administration’s aggressive pursuit of tariffs had contributed to an expected easing of price pressures.

“In a really bad outcome there could possibly be a recession,” Ms Bullock said, noting also “that businesses are finding that their margins are being impacted” by higher energy and labour costs domestically. 

“Inflation is in the target band and upside risks appear to have diminished as international developments are expected to weigh on the economy,” the RBA board said in its statement. “With inflation expected to remain around target, the board therefore judged that an easing in monetary policy at this meeting was appropriate.”

In fresh forecasts accompanying the decision the bank projected GDP growth to be lower at 1.8 per cent in the year to June, down from the bank’s February forecast of 2 per cent.

It lowered growth expectations for the second half of this year to 2.1 per cent from its earlier 2.4 per cent forecast.

As Mr Trump’s trade war plays out with China, the bank has forecast that in an extreme downside scenario, the level of Australia’s GDP is expected to be more than 3 per cent smaller over the next two years. That will also drive inflation down further to 2 per cent by the end of 2026.

A further increase in government spending is forecast to make up for the shortfall in business ­investment growth, which is now expected to halve to 0.6 per cent in the six months to December from the 1.4 per cent the bank had forecast in February. Household spending growth was cut back to 1.9 per cent from 2.6 per cent.

Government spending is to ramp up again by 5.5 per cent from earlier forecast of 5.3 per cent, and 4.6 per cent from 4.3 per cent.

Treasurer Jim Chalmers took comfort in the second rate cut under his watch.

“Today’s cut doesn’t mean the job is finished, but it will help,” he said, promising “more help is on the way” for working families with a mortgage.

The big four banks quickly passed on the full RBA rate cut to their mortgage borrowers, with NAB saying a customer with a 30-year mortgage of $550,000 would save $83,000 in interest over the life of the loan and pay it off two years earlier if they kept repayments the same following the latest cut.

NAB group executive for personal banking Ana Marinkovic said more than 95 per cent of customers opted to keep repayments at the same level when rates last decreased in February, choosing to pay down their home loan quicker and save more in the long term.

Economists forecast the bank would cut rates – the first since November 2020 – despite higher wage growth readings last week, which hit 3.4 per cent – slightly higher than the bank’s latest forecast of 3.3 per cent.

Financial markets are now pricing in another two 0.25 percentage point rate cuts this year with a 76 per cent chance of a third.

Ms Bullock said there was some risk that businesses under pressure from higher energy and labour costs could start to pass on higher prices later in the year. “Businesses are finding that their margins are being impacted, so they are having to absorb some of the cost increases,” she said.

CreditorWatch chief economist Ivan Colhoun said the rate cut would bring relief to businesses struggling with higher costs despite underlying inflation having fallen back into the central bank’s target range.

“This cut can be expected to flow into reductions in variable rate mortgages and many business borrowing rates in coming weeks and will be welcomed by both consumers and businesses feeling the continuing pressures of elevated costs,” Mr Colhoun said.