The Reserve Bank board backed up its back-to-back cuts in June and July with another rate cut today, taking the official interest rate to a new record low of just 0.75 of a percentage point. That is down by 25 basis points on the 1 per cent level it had been ahead of the meeting.
Just over half (25 out of 45) of the economists and industry experts on Finder’s interest rates panel correctly predicted the decision, largely based on the back of disappointing labour figures and rising unemployment.
Similarly, Tim Lawless, head of research at property data firm CoreLogic, said that “a trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA’s decision”.
RBA cites ‘downside risk’ as forcing its hand
“While the outlook for the global economy remains reasonable, the risks are tilted to the downside,” RBA governor Philip Lowe said in a statement accompanying the announcement of the rate cut.
“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target. The economy still has spare capacity and lower interest rates will help make inroads into that.”
He cited the ongoing US–China trade war as a major factor, which is hitting international trade and cutting business investment due to the resulting market uncertainty.
“Interest rates are very low around the world, and further monetary easing is widely expected as central banks respond to the persistent downside risks to the global economy and subdued inflation,” Mr Lowe said.
Yet it wasn’t all global factors that influenced the decision.
The governor also pointed to weaker-than-expected economic growth in Australia, which came it at 1.4 per cent for the June quarter, wage growth stagnation and an easing in job creation.
“A further gradual lift in wages growth would be a welcome development,” he said.
Meanwhile, inflation shows little prospect of getting out of control any time soon, with Mr Lowe stating that “inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.”
Home loan rates could fall below 3 per cent
It comes as finance brokerage Finsure suggested that home loan customers could soon expect an interest rate with a “2” at the front of it, believing that mortgage rates will soon fall below the 3 per cent threshold.
“With many owner-occupier rates already in the low 3.0 per cent range, there is an opportunity to secure a rate with a ‘2’ in front when the RBA makes a 25 basis point reduction to official rates,” its managing director, John Kolenda, said.
“Borrowers should be reviewing their home loan every time the RBA makes an adjustment to the cash rate. There’s no prospect of rates going up any time soon, so this should be a shot in the arm for consumer confidence.
“With Christmas approaching, the domestic economy will lift if consumers have a change of heart and start spending again.”
Rate comparison site Finder suggested that yet another rate cut is likely from the Reserve Bank in its current easing cycle, with 26 of the 36 economists and commentators it polled believing the official cash rate in Australia is heading towards 0.5 of a percentage point.
Insights manager Graham Cooke added, however, that interest rates alone may not be sufficient to kickstart the economy.
“The RBA uses each cut like a defibrillator to zap the economy back to life, but as the rate gets closer to zero, they are running out of options,” he said.
“An injection of cash [quantitative easing] and the potential of a negative cash rate may be the only option to stimulate the economy.”
Housing market turning around
The decision comes as the housing market shows renewed signs of life, particularly in Sydney and Melbourne after two years of prices going backwards.
CoreLogic’s home value index for September showed that Australia-wide, house prices were up by 0.9 of a percentage point for the month. Much of that growth, it found, was driven by the country’s two largest cities, with Sydney and Melbourne posting 1.7 per cent gains for the month.
Over the past two months, Sydney house prices have surged by 3.3 per cent, and Melbourne by 3.2 per cent. Both cities, however, remain below their 2017 peaks, to the tune of 11.9 per cent and 7.9 per cent, respectively.
The number of new listings recorded in each of Australia’s capital cities has also fallen over the past year — most by double-digit percentages — suggesting that tight supply will put upward pressure on prices.