RBA cuts interest rates to a new record low

Interest rates have been cut to a new historic low and are not likely to be increased for at least three years, after the Reserve Bank of Australia acting in line with economists' predictions and slashing the official cash rate to 0.1 per cent.

RBA governor Philip Lowe said the new record-low rate would help support job creation and the recovery of the Australian economy from the pandemic.

Dr Lowe said while Australia’s economic recovery was under way, it would take time to reach the pre-pandemic levels of prosperity.

“Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time,” Dr Lowe said.

“For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. 

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. 

“Given the outlook, the Board is not expecting to increase the cash rate for at least three years.”

The rate cut was in line with economists’ expectations, with 29 of 43 experts surveyed by Finder this month predicting a new record low.

Finder insights manager Graham Cooke said while there had been some skepticism from experts that a rate cut would be effective, the strength of the Australian dollar and a lagging Victorian economy supported the case to ease monetary policy.

AMP Capital’s Shane Oliver said the rate cut was necessary as the RBA was not likely to meet its employment and inflation objectives over the next two years.

Real Estate Institute of Australia president Adrian Kelly said the move would help to improve housing affordability, but only if banks actually passed on the cut.

“The RBA is obviously throwing the kitchen sink at this pandemic and today’s decision will definitely benefit home buyers,” Mr Kelly said.

“For the June quarter of 2020, REIA’s Housing Affordability Report showed that housing affordability had already improved with the proportion of income required to meet loan repayments decreasing to 34.5 per cent, a decrease of 0.2 percentage points over the quarter.

“Today’s interest rate cut, if passed on, would see the proportion of income required to meet loan repayments decreasing to 33.9 per cent.”

New research by Canstar, however, has revealed that Australians are not likely to spend more even if banks pass on the rate cut.

Just 6 per cent of 1,054 respondents to a new Canstar survey said a rate cut would encourage them to spend more in the next 12 months, with higher wages, improved savings interest rates and job security top drivers for increased consumer spending.

Canstar Group financial services executive Steve Mickenbecker said the cut was unlikely to stimulate the economy.

“With existing home and business borrowers unlikely to see much of the cut and the former unlikely to spend it even if they do, the stimulus of a rate cut to the economy will be very modest,” Mr Mickenbecker said.

“Borrowing rates are so low already that a cut is largely irrelevant. Even if passed on fully, a cut of 0.15 per cent to the average $400,000 over 30 years will lower the monthly repayment by $33, not enough to make much of a difference to borrowers’ spending and house purchase intentions.

“Economic stimulus now is all about confidence and jobs.”