Reserve Bank retains faith in rate cuts
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 0.75 per cent. It is the third reduction in official rates in five months.

What has changed since the last meeting?

• The Aussie economy grew by 1.4 per cent over the year to June – the weakest growth in a decade.

• The Australian jobless rate lifted to a 12-month high of 5.3 per cent in August.

• The CoreLogic national home price index rose by 0.9 per cent in September.

• The Federal Budget was broadly in balance for the 2018/19 year.

• Annual credit growth stood at 2.9 per cent in August – the slowest rate recorded in eight years.

• Job vacancies fell 1.9 per cent in the three months to August.

• Household wealth rose 1.6 per cent to record highs in the June quarter.

• The Australian dollar has generally held around US67-69 cents.

• The US and China will hold high-level trade talks in October.

• US House Democrats began an Impeachment Inquiry into the US President.

The assessment

• Reserve Bank Governor Philip Lowe still believes that rate cuts can be effective in stimulating the economy. First, rate cuts keep the Aussie dollar low, boosting business competitiveness. Second, rate cuts reduce borrowing costs, boosting spending capacity. But the risk is that – in a behavioural sense – both depositors and borrowers get ‘spooked’ by record low interest rates, curtailing spending on recession fears.

• The Reserve Bank has left the door open for even lower rates. But this expectation will spark debate as to the value of further rate cuts. The time has come for more fiscal initiatives.

Perspectives on interest rates

• The Reserve Bank cut the cash rate by 25 basis points (quarter of a per cent) to 0.75 per cent after cutting rates in June and July, 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.

• 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 Reserve Bank is doing everything in its power to stimulate growth in the economy. Mathematically, three interest rate cuts are still possible before the Reserve Bank has to look at unconventional measures to stimulate activity. Commonwealth Bank economists tip another rate cut to be delivered in February 2020.

• The good news is that there are more signs emerging of a strengthening of the economy with home prices, exports, consumer confidence, employment and infrastructure activity all lifting.

Published by Craig James, Chief Economist, CommSec