Reserve Bank: Rate cuts are working
Reserve Bank Board meeting

The Reserve Bank has left the cash rate at a record low of 0.75 per cent.

What has changed since the last meeting?

The CoreLogic national home price index rose by 1.7 per cent in November – the biggest rise in 16 years.

Wages rose 0.5 per cent in the September quarter to be up 2.2 per cent on the year.

Building approvals fell by 8.1 per cent in October.

Business confidence and conditions rose in October.

Job ads fell by 1.7 per cent in November.

Private sector credit annual growth fell from 2.7 per cent to a 9½-year low of 2.5 per cent in October.

Employment fell by 19,000 in October – the first fall in 17 months.

The jobless rate rose from 5.2 per cent to 5.3 per cent.

In the twelve months to October 2019, the Budget deficit stood at just $78 million.

New business investment (spending on buildings and equipment) fell by 0.2 per cent in the September quarter to be down by 1.3 per cent over the year.

The rolling annual trade surplus was a record $63.35 billion in the year to September.

The Australian dollar has generally held around US66-69 cents.

The US and China are still reportedly progressing on a ‘Phase 1’ trade deal.

US and Australian sharemarkets hit record highs in November.

The Reserve Bank Governor spoke on ‘unconventional monetary policies’.

The assessment

The Reserve Bank emphasises that rate cuts are indeed working. “The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. It has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.”

Perspectives on interest rates

The Reserve Bank has left the cash rate at 0.75 per cent after cutting rates in June, July and October, each by 25 basis points. There have now been 15 rate cuts since November 2011 with the cash rate cut from 4.75 per cent.

Previously rates rose seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

Interest rates are set to stay low for an extended period. The latest monthly reading suggests that inflation remains stuck near 1.5 per cent – well below the Reserve Bank’s 2-3 per cent target zone.

Rates could still go lower but the Reserve Bank seems prepared to play the waiting game. The Reserve Bank has emphasised that the rate cuts are indeed working, suggesting it may allow more time before deciding the next rate move. While rate cuts have caused confidence to weaken, the RBA is asking people to focus on the positives of lower rates like higher home prices and a lower Aussie dollar.

The Commonwealth Bank Group has pencilled in another rate cut in February. But fiscal policy stimulus is preferred. The midyear budget review is handed down later in December.

Comparing the two most recent statements

The statement from the previous November 2019 meeting is on the left; the statement from today’s December 2019 meeting is on the right. Emphasis has been added to highlight key points in the wording in the statements.

Published by Craig James, Chief Economist  CommSec