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RBA hopes cut will stimulate activity

June 20, 2019

The big news in June was the Reserve Bank’s decision to cut the cash rate to a record low of 1.25 per cent. While mortgage holders were celebrating, all eyes immediately turned to what it means for the economy and the RBA’s next move.

Record low interest rates

The Reserve’s cut was the first since August 2016 and the downward move was little surprising to economists. A weak domestic housing market and its knock-on effects for manufacturing and retail moved the Reserve’s hand. ABS figures released the day after the RBA’s decision confirmed a slowing economy with the growth rate at 0.4 per cent for the first three months of 2019, significantly lower than expectations. That brought the yearly inflation figure down to 1.8 per cent.

The last time rates were this low, Robert Menzies was Prime Minister, a Sydney house cost $4,500 and could be serviced on the average wage of $60 per week.

More cuts to come

Financial markets are pricing in two more cuts but are not clear on the timing. Sentiment is weighing down on business capital expenditure and hiring, and the Reserve hopes the cut will get things moving on the business investment front.

The residential construction sector is likely to remain a drag on the economy for another two to three years as oversupply of apartments begins to hit the market over the short to medium term. Although sentiment has shifted in headlines towards a more positive outlook in housing, the numbers are not yet living up to the optimism.

Rate cuts felt unevenly

Not everyone is sharing in the bonhomie of the cut. Savers and retirees who reply on interest payments as part of their income lose out yet again, and this has the impact of reducing their disposable income. But there are some winners. The cut had the impact of lowering the Australian dollar, giving exporters a boost, as overseas buyers get more bang for their buck.

Questions remain about the efficiency of interest rate cuts as a stimulus for activity as householders seek to pay down record levels of household debt. Will the cuts be enough to get consumers spending? With slow wages growth, inflation moderating and tax cuts coming, the Reserve hopes that cuts will encourage consumers to pull out their cash.

Global outlook

The RBA is still keeping its eye on the global outlook with the US–China trade war rattling along and China signalling its intention to blacklist some American companies (that they’ve yet to name). Slowing economies in other parts of Asia and Europe are worrying Reserve governors, with German bonds dropping to historic lows.

But the news is not all bad on the global front. Wages are picking up (albeit at a snail’s pace) and unemployment across the globe is generally low.

Government spending?

On the positive front, government infrastructure spending remains strong despite talk of returning the budget to surplus. In a low-interest-rate world, it makes sense for the government to pull out its cheque book to start spending, and the Reserve hopes the government’s fiscal policy can give the economy a kick-along.

Where to from here?

Interest rates are the talk of the town at the moment and will be for months to come. It’s all eyes on monetary and fiscal policy. They need to get the levers right to weather the mild global storm on the horizon and steer the Australian economy into a safe harbour.

Of course, low rates mean money is cheap – now might be just the right time to take advantage of low rates at the end of the financial year to get your business moving. Talk to your finance provider today to see what’s possible.

Low rates mean money is cheap – now might be just the right time to take advantage of low rates at the end of the financial year to get your business moving.