7min read
PREVIOUS ARTICLE ASX falls flat after RBA cuts ... NEXT ARTICLE Home loan rates drop after RBA...

Reserve Bank Board meeting

The Reserve Bank has cut the cash rate by 25 basis points (quarter of a per cent) to a record low of 1.00 per cent. It is the second change in rates in 35 months (32 meetings).

What has changed since the last meeting?

• The Aussie economy grew by 1.8 per cent over the year to March – the weakest annual growth rate in 9½ years.

• The Australian jobless rate was steady at 5.2 per cent in May.

• The CoreLogic national home price index fell by 0.2 per cent in June.

• The Federal Budget was broadly in balance for the 12 months to May.

• The NAB business confidence index rose to a 10-month high of +7.3 points in May – the biggest lift in six years.

• Australia recorded a 16th successive monthly trade surplus of $4.87 billion in April.

• Annual credit growth stood at 3.6 per cent in May – the slowest rate recorded in 5½ years.

• The Australian ASX200 share index hit fresh 11½-year highs in June and was up 7.1 per cent over the quarter.

• The Australian dollar has held around US68-70 cents.

• US President Trump and Chinese counterpart Xi Jinping agreed to restart trade talks at the G20 Summit in Japan.

• US Federal Reserve Chair Powell said “The case for somewhat more accommodative policy has strengthened”.

The assessment

• Reserve Bank Governor Philip Lowe recently said that “is not unrealistic to expect a further reduction in the cash rate”, but cautioned that “it is important though to recognise that monetary policy is not the only option, and there are limitations to what can be achieved.” An easing of fiscal policy and structural reforms, including a focus on microeconomic, tax and innovation, are also required to support the economy through its current ‘soft patch’.

• Reserve Bank policymakers have become increasingly focused on developments in the labour market with a stated objective to get the jobless rate closer to 4½ per cent. In order to achieve this, a reduction in spare capacity and underemployment via policy stimulus is required to boost household incomes and eventually stoke inflation.

Perspectives on interest rates

• The Reserve Bank cut the cash rate by 25 basis points (quarter of a per cent) to 1.00 per cent after beginning the latest easing cycle on June 4 2019 (25 basis points). It is the first time there have been consecutive rate cuts since May/June 2012. There have now been 14 rate cuts since November 2011 with the cash rate cut from 4.75 per cent.

• The Reserve Bank had previously lifted rates 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?

• The Aussie economy continues to face challenges. The end of the residential property construction boom and growing consumer caution are weighing on domestic demand. Government spending on infrastructure and health care is lending support, but global growth has slowed due to trade protectionism.

• But it’s not all bad news. Following the Federal election, business and consumer confidence have rebounded and the housing market is showing tentative signs of stabilisation. And it appears likely that income tax cuts will eventually be passed by the new Australian parliament in the coming weeks. Reports of a US-China trade détente in the aftermath of the G20 Summit on the weekend has the potential to lift sharemarkets, boosting Aussie wealth.

Published by Ryan Felsman, Senior Economist, CommSec