Waiting to cut rates would have been more advisable

It’s the most controversial decision by the Reserve Bank in a decade.

On Tuesday, the RBA board cut the official cash rate to a record low of 0.75 per cent, pushing the economy closer to a state of near zero official interest rates and possibly even mass artificial money creation.

A bounce in house prices in Sydney and Melbourne following back-to-back winter interest rate cuts wasn’t enough to convince the nine-member board to wait before reducing the cash rate a third time this year.

Hopes for rebounds in retail sales and household spending following the government’s vaunted $8bn tax cut that took effect in July haven’t yet materialised. “The economy still has spare capacity and lower interest rates will help make inroads into that,” RBA governor Philip Lowe said in a statement.

While it’s clear wage and economic growth have been weak, it’s less clear lower mortgage rates will have much effect on boosting them.

Waiting would have been advisable.

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The cut paves the way for mortgage rates well below 3 per cent — the lowest in history. These will almost certainly boost demand for home loans and house prices.

In just a few months, house prices in Sydney and Melbourne have shot up about 4 per cent. While housing turnover remains the lowest in a generation and credit growth is yet to bounce, it would be surprising if the combined effect of three interest rate cuts in five months didn’t juice the housing market.

Moreover, such aggressive rate cuts risk undermining business confidence as much as helping it. And the RBA is going out on a limb politically, given a series of warnings that further cuts would be ineffective or damaging from figures such as former treasurer Peter Costello, former RBA deputy governor Stephen Grenville and former RBA board member Warwick McKibbin.

“Australia now has the equal sixth-lowest interest rate in the world and is on par with the UK, an economy that is grappling with Brexit-induced uncertainty,” said Anthony Doyle, an investment adviser at Fidelity.

Most economists expect the RBA board to cut interest rates at least one more time over the next six months, paving the way for quantitative easing in 2020 if required — a step the RBA has stressed in recent weeks remains “unlikely”.

Dr Lowe is upbeat, stressing the economy is on the right side of a “gentle turning point”. That’s not so reassuring given how optimistic the RBA’s forecasts have been in recent years.