Another RBA rate cut could do more harm

The Reserve Bank has been warned against cutting ­official interest rates to a record low.

RBA governor Philip Lowe. Picture: Hollie Adams

The Reserve Bank has been warned it risks further denting consumer confidence if it cuts ­official interest rates to a record low as early as Tuesday’s board meeting and must take steps to fully explain the reason for the move to the public.

The RBA is widely expected to slice the cash rate to 0.75 per cent in a bid to kickstart the economy and reverse rising unemployment. The move would come amid increasingly tepid growth, a strike on local business investment, anaemic credit growth and the global trade row between the US and China.

Economists are worried the rate cuts are doing more harm than good by scaring already-­nervous consumers into shutting their wallets.

“The Reserve Bank is cutting for two reasons: one is because the economy is weaker and the other is that it is harder to get ­inflation rising,” said Deloitte ­Access Economics principal Chris Richardson.

“Inflation is the bigger of the two things fussing the Reserve Bank at the moment, but it’s the thing Mr and Mrs Suburbs have trouble understanding.

“The RBA risks being their own biggest enemy by worrying people too much with the rate cuts, which are contributing to weakening consumer confidence and leaving consumers more worried that they should be.

“I have no problem with the RBA cutting rates on Tuesday and probably again in February, but it’s up to the bank to change the community’s understanding of why it is cutting rates.

“If rate cuts create 200,000 jobs and get wages growing again, that’s good news.”

Consumer confidence took a dive after the latest round of ­easing by the RBA when the bank lowered its official cash rate to 1 per cent, with back-to-back cuts in June and July, the first successive reductions since 2012.

The central bank has continued to warn that lower interest rates will not be enough to dig the economy out of its hole, but Josh Frydenberg has rejected requests to fast-track more tax cuts or bring forward infrastructure spending to stimulate the ­economy.

The Treasurer, who has called on the big banks to pass on the savings from any rate cuts to mortgage borrowers, said on Monday that recent RBA cuts had helped stabilise the housing market.

 

“We’ve also seen prices rise after a period of consecutive months where they fell,” Mr Frydenberg said.

“As a government, we’re ­responsible for fiscal policy, and they’re (the RBA) responsible for monetary policy.”

Last month the OECD cut its economic forecast for Australia this year from 2.3 per cent to 1.7 per cent, after official figures put the jobless rate at a 13-month high of 5.3 per cent.

The RBA last month warned Scott Morrison’s $1080 tax rebates and the back-to-back rate reductions had failed to get consumers to open their wallets, amid the slowest annual economic growth since the global ­financial crisis.

Data from major banks has found that up to 70 per cent of households with a mortgage were not reducing the amount they ­repaid on their loan after the RBA cut rates.

Official figures on Monday ­revealed annual credit growth slipped below 3 per cent to 2.9 per cent in August — the softest outcome since mid-2011 — and far down on the rate of 4.5 per cent one year ago.

“Credit growth was anaemic in mid-2019, with housing weak in the wake of the sharp downturn and with business hitting a soft spot around the time of the federal election,” said Westpac economist Andrew Hanlan.

“Move forward to August and credit growth remains weak ­despite the lift in new lending for housing in response to interest rate cuts.”

Housing credit growth fell from 3.3 per cent to 3.1 per cent, the slowest rate on record.

CommSec chief economist Craig James said fuel price rises in the wake of the drone strike on a Saudi fuel refinery were also denting consumer confidence.

“Inflation remains low,” Mr James said. “Outstanding loans are still growing, but at the slowest pace in eight years. And the ­Chinese economy continues to struggle. The average family is forking out $60 a week for petrol or $240 a month. While that isn’t far off the average over recent months, the fuel bill has been volatile, serving to restrain consumer enthusiasm.”

AMP Capital chief economist Shane Oliver said a common ­question in relation to the recent round of rate cuts was “things aren’t that bad, so why is the RBA cutting?”

Mr Oliver said that waiting for a recession to hit was “likely leaving it too late”.

“To be sure the risk of conventional recession in Australia has increased — although for the reasons noted here I think it remains unlikely,” he said.

“The slowdown in Australian growth to below the level of population growth at a time of weak wages growth and high underemployment is a real concern and highlights the need to boost growth and productivity.”