Reserve bank interest rate cut

Last week, the RBA cut official interest rates to a record low 0.75% and has signalled an intent to go lower, if required. So why the haste? Here is our summary of why rates are being lowered.

  • A rate cut will hopefully improve business confidence to expand, invest, innovate and hire.
  • Inflation is below the RBA’s target range of 2-3%. THE RBA wants a modest degree of inflation as it correlates with positive economic growth when in that band.
  • National unemployment levels are higher than expected at 5.3% and the RBA’s forward-looking employment indicators of labour demand indicate that employment growth is likely to slow.
  • Consumer confidence is low, so much so that the Australian retail industry is in recession.
  • Lower rates help keep our A$ low (around US66c being the lowest since the global financial crisis of 2008) which benefits our export industries (because a lower exchange rate makes our exported goods cheaper in international markets).
  • The RBA knows that the banks cannot afford to pass on the full rate reductions because the banks need to continue to offer attractive deposit interest rates as it is these deposits that are used to provide loans.
  • According to the RBA “the global appetite to save is high relative to the appetite to invest.” This has prompted low-interest rates globally, which is in turn affecting the global economy.
  • Globally, the main issue at the moment is the uncertainty generated by a series of geopolitical events, particularly the US-China disputes over trade and technology. This is undermining business confidence in Australia.
  • The RBA notes that loan arrears, while rising, remained low and many households have built substantial buffers which would cushion them from job losses. Despite that, the RBA Governor admitted around a quarter of all households with a mortgage had either no buffer or only a marginal cushion against rising unemployment.
  • In addition, almost 4 percent of borrowers had loans larger than the value of their properties, with around half of those in Western Australia where property prices are still more than 21 per cent below their previous peak.

The RBA is now hoping desperately that lower interest rates, recent tax cuts, ongoing government spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector “should all support growth”.