Monday, 06 July, 2020

Australia cuts rates to record low

A man walks past the RBA sign in Sydney A man walks past the RBA sign in Sydney
Ginger Lawrence | 09 June, 2019, 13:05

The market is expecting weak gross domestic product growth of 0.4 per cent in the quarter and 1.8 per cent annually.

As expected the Reserve Bank cut official interest rates to a new record low of 1.25% on Tuesday (down 0.25%) in an attempt to stimulate a sluggish economy.

"The recent inflation outcomes have been lower than expected and suggest subdued inflationary pressures across much of the economy".

The RBA was expected to cut the cash rate in May but made a decision to hold off as it monitored the strength of the labour market.

Domestic and global economic headwinds continue to persist and with inflation not seen recovering in a robust manner towards their 2% to 3% target band, more rate cuts down the road look more likely. "I'm not anticipating to get to those levels".

"We are facing economic challenges both domestically and internationally, particularly from the trade tensions between China and the US", Mr Frydenberg told Nine's Today program this morning.

The property industry was quick to welcome the rate cut.

More cuts are coming, says Dr Lowe.

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Tuesday's rate cut means mortgage rates will likely come down, and Dr Lowe called on banks to pass along the full 25 basis point reduction to their retail customers.

"Today's decision to lower the cash rate will help make further inroads into the spare capacity in the economy", he said.

ANZ was first major to respond in a move similar to that by big banks following the previous RBA cut in August 2016, when they reduced variable rates by an average 0.13 percentage points and pocketed the rest.

In the Q&A session, Lowe said that if unemployment can be pushed down to around 4.5%, then he's confident that inflation will rise back to within the central bank's target range.

"In aggregate, the household sector pays around two dollars in interest for every dollar it receives in interest income", he said.

"Given this, the possibility of lower interest rates remains on the table".

But Mr Lowe said that monetary policy wasn't the only way to reduce unemployment; there were also fiscal policies such as increase spending on infrastructure and structural policies that support firms expanding and hiring people.

"Structural policies not only help with job creation, but they can also help drive the productivity growth that is the main source of improvement in our living standards", he said. "So, as a country, it is important that we keep focused on this".