The Reserve Bank of Australia has cut the cash rate to another record low of 0.75 per cent, with the board prepared to go even lower if the nation’s flagging economy does not respond.
The market had largely priced in Tuesday’s 0.25 percentage point cut despite lingering doubts over whether the move will deliver the desired lift in household consumption.
The RBA had reduced the rate in both June and July in an attempt to shake the country out of economic stagnation, holding at 1.0 per cent during August and September as it observed whether the cuts – as well as the federal government’s tax offsets – had flowed through to the economy.
But there have been few signs so far this has had an impact anywhere but the housing market, where prices have shown signs of ballooning again in the major Sydney and Melbourne markets after a two-year downturn.
Figures released just hours before the RBA‘s decision showed property prices continue to accelerate at their fastest pace since March 2017.
However, approvals to build new homes continue to slide, adding to a litany of disappointing indicators that include weak retail trade, stagnant wage growth, below-target inflation, and climbing underemployment.
In his statement on Tuesday, RBA Governor Philip Lowe said the board decided to cut again in an attempt to eat into persistent labour market slack, amid signs employment growth is likely to slow from its recent fast rate.
Dr Lowe also said the board took account of the forces pushing interest rates down in other countries and the effects this trend is having on the Australian economy and inflation outcomes.
“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation,” he said.
Crucially, Dr Lowe said the RBA would consider cutting rates to 0.5 per cent in order to support sustainable growth, full employment and the achievement of the inflation target over time.
He said the main domestic uncertainty was low household consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on spending.
Nonetheless, Dr Lowe maintains the economy has reached a “gentle turning point” for after annual growth hit a decade low of 1.4 per cent in the June quarter.
A cut to 0.5 per cent is almost completely priced in for February, and deemed a certainty by the market by May 2020.
Callam Pickering, APAC economist at jobs site Indeed, said the possibility of “unconventional measures” enhanced the closer rates get to zero.
“In the absence of meaningful fiscal stimulus, quantitative easing may soon be inevitable,” Mr Pickering said.
Finance expert Steve Mickenbecker said an increase in the unemployment rate to 5.3 per cent last month, on top of sluggish growth, and concerns over world trade the case for a cut was overwhelming.
However, he said borrowers should not expect the full 0.25 per cent to passed on by their bank.
“With their profit margins under pressure from low rates the cut is likely to be between 0.15 per cent and 0.20 per cent,”
A 0.25 per cent cut, if passed on in full, would equate to additional savings of about $70 per month on a 25-year standard variable loan of $500,000.
The Australian dollar spiked from 67.47 to 67.61 US cents immediately after the decision before plummeting to 67.25 by 1500 AEST.