Just minutes before the Melbourne Cup gets underway, the Reserve Bank has unveiled its latest determination on interest rates in Australia.
Following its monthly board meeting on Tuesday (5 November 2019), the RBA announced that it would keep interest rates on hold for the time being, at the record low of just 0.75 of a percentage point.
Industry commentators and finance pundits had overwhelmingly bet on no movement by the RBA, with many suggesting that rates will be on hold until at least February 2020, once data on the strength or weakness of Christmas and Boxing Day sales in the retail sector had filtered through.
The RBA board does not meet in January.
Such a belief that more action is needed to boost Australia’s economy is supported by the latest retail sales figures.
The Bureau of Statistics on Monday (4 November) revealed that retail sales had fallen by 0.1 of a percentage point in the September quarter — despite back-to-back cuts to interest rates in June and July and the government’s much-hyped tax cuts for SMEs and low- to middle-income earners.
The fall also came on the back of a modest 0.1 of a percentage point increase in the June quarter before much of this stimulus had flowed through.
“Considering the RBA is running out of conventional monetary policy ammunition, the decision to hold the cash rate at the historic low of 0.75 [of a percentage point] was widely anticipated,” said Tim Lawless, research director at property data firm CoreLogic.
“The decision to keep rates on hold was supported by the latest labour market and inflation readings, which saw the national unemployment rate nudge lower, while annual headline inflation edged slightly higher.
“Additionally, a rebound in housing values and a rise in buyer activity will hopefully begin to flow through to a gradual improvement in household wealth and spending.”
All 38 economists and commentators on Finder’s RBA Cash Rate Survey panel had put their bets on the central bank holding fire on any more rate cuts this month.
More than half of them are anticipating a further interest rate cut in February 2020, although seven suggested that a pre-Christmas rate cut in early December could be on the cards.
Meanwhile, John Kolenda, managing director of finance brokerage Finsure, had suggested that the RBA may have already done enough to stimulate the economy with the previous cuts to interest rates made in June, July and October.
“Having confident consumers is a major contributor to an economic turnaround and the domestic economy is still showing signs of improvement,” Mr Kolenda said ahead of the RBA’s announcement.
“It is good to see the government talking to the banks about the way they have been applying the responsible lending guidelines to small and medium-sized enterprises. By supporting more lending and our SMEs, we should see positive signs of further economic improvement.
“In this environment, there is no real need for the RBA to do much more until they get a better view of the economy into the first quarter of next year.”
Are rate cuts really helping?
There has been plenty of debate recently about whether interest rates remain an effective tool for the RBA to support Australia’s economy, particularly as they approach zero and banks refrain from passing on the full cuts to their mortgage customers.
CoreLogic’s Mr Lawless went one step further though, suggesting that the ultra-low interest rates environment may actually prove counter-productive.
“One of the negative side effects of such historically low interest rates is that Australian households and businesses are reading through the low rate setting and becoming less confident about their household finances and the outlook for the economy,” he said.
“[This] is offsetting some of the stimulatory benefits of historically low interest rates.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.