reserve bank

As widely forecast, the Reserve Bank cut official interest rates 0.25 of a percentage point to a new record low of 1.25% in an attempt to stimulate a sluggish economy and eliminate spare capacity. The cut was the first since 2016 when the bank cut rates twice in May and August — and many economists are predicting at least one more cut to 1% by the end of the year and maybe more next year.

The rate cut is a belated admission that the economy is idling and, with the government intent on removing any fiscal stimulus, the central bank has been forced to fire one of its remaining monetary policy shots despite concerns that it will have nothing left in the locker in the event of a recession.

“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy, Governor Philip Lowe said in a post-meeting statement. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”

“The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low,“ Lowe said. In fact, wages growth has been static now for the past nine months according to the Wage Price Index, forcing the central bank to look elsewhere for measures that show wages growing. “A further gradual lift in wages growth is expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment.”

Crucially, Lowe noted that “bank funding costs have also declined further, with money-market spreads having fully reversed the increases that took place last year” — meaning any failure by banks to pass on the full rate cut — as ANZ failed to — is unjustified.

Lowe flagged that the, as many economists expect, the RBA may yet cut rates further, ending with “The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”

Any quibbles board members may have had about a cut might have been addressed by retail sales data for April, which were released today. They showed sales falling 0.1%, seasonally adjusted — the kind of tepid result that illustrates an economy that’s not growing anywhere near fast enough to drive down unemployment below 5% — or lift inflation back to the Bank’s target band of 2-3%.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey