Rate cut to boost employment and economic growth
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 1.25 per cent. It is the first change in rates in 34 months (31 meetings).

What has changed since the last meeting?

The Coalition Government was returned to power at the Federal Election.

The Australian jobless rate rose from 5.1 per cent to 5.2 per cent in April.

Private sector wages rose by 2.4 per cent over the year to March.

The CoreLogic national home price index fell by 0.4 per cent in May.

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

The annual total of dwelling approvals is close to the decade average.

Annual credit growth stands at 3.7 per cent – the slowest rate recorded in 5½ years.

The Australian ASX200 share index hit 11½-year highs after the Federal Election.

The Australian dollar has held around US68-69 cents.

There is uncertainty about whether a US-China trade agreement will be successfully concluded.

The US Federal Reserve expects to leave rates on hold over 2019.
The assessment

• The Reserve Bank cut interest rates to a fresh record low 1.25 per cent today after an extended pause going back almost three years. Unemployment has edged higher, inflation remains anchored below the Reserve Bank’s 2-3 per cent target and a deteriorating global growth backdrop is likely behind the move.

• In the final paragraph of the Reserve Bank’s Statement, the Board emphasised that “the decision to lower the cash rate….will assist with faster progress in reducing unemployment and achieve more progress towards the inflation target.” Clearly, Governor Philip Lowe is hoping that additional policy stimulus will reduce spare capacity in the economy, lower the jobless rate back towards 4-4.5 per cent and in-turn lift wages and stoke inflation.
Perspectives on interest rates

• The Reserve Bank cut the cash rate by 25 basis points (quarter of a per cent) to 1.25 per cent. The previous move was a rate cut on August 2 2016 (25 basis points). There have been 12 rate cuts since November 2011, with the Reserve Bank cutting rates from 4.75 per cent to 1.50 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?

• It is good news for first home buyers. Less positive news for those relying on interest income like self-funded retirees. But the hope is that lower rates and other stimulus measures like tax cuts cause consumers to spend. And, in turn, that businesses lift hiring and investment. There are good chances that these hopes will be fulfilled given the positive post-election environment. But if not, the Reserve Bank will cut interest rates further in August (after the next inflation data).

Published by Ryan Felsman, Senior Economist, CommSec