RBA Takes Rates To Record Low Of 1%

By Glenn Dyer | More Articles by Glenn Dyer

More rate cuts are on the cards from the Reserve Bank – but not quite yet – after the central bank yesterday cut its cash rate by 0.25% for the second month in a row.

The RBA cut the cash rate to 1%, the lowest level on record, as it tries to boost the economy enough to drive down unemployment and lift wages and household spending.

The news from the RBA at 2.30pm saw the ASX 200 trim its gains of around 29 points in the afternoon to 5.1% by the close while the Aussie dollar traded around 69.80 US cents, which was a small rise.

Yesterday’s cut was made for the same reasons as in June – the weak economy, weak growth, weak household spending, sluggish wage growth and the absence of any other boost from higher government spending.

Following its monthly board meeting in Darwin Governor Philip Lowe revealed the bank would slice the cash rate by 0.25% points for the second month in a row.

It is the first back-to-back cut in interest rates since 2012 when the central bank cut rates by 0.50% in May and 0.25% in June of that year.

Governor Lowe flagged the second rate cut in a speech in Adelaide last month.

“It would be unrealistic to expect that lowering interest rates by one-quarter of a percentage point will materially shift the path we look to be on. It is not unrealistic to expect a further reduction in the cash rate,” he told a business audience.

In his statement yesterday Mr. Lowe repeated the comments from the June statement with a key new phrase included in the important final paragraph of the statement – “if needed”.

“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.

“The Board will continue to monitor developments in the labour market closely and adjust monetary policy “if needed” to support sustainable growth in the economy and the achievement of the inflation target over time.”

That phrase will see the RBA move back to the sidelines in a sort of watch and hold stance as it assesses the data flow of the next two months on inflation, retail spending, jobs, home building and the June quarter national accounts in early September.

Up to 6pm last night, only the ANZ had passed on the June cut in full to mortgage holders.

The obvious pressures with rising compression on bank deposit rates is evident in the announcement from the Commonwealth.

Some bank deposit rates will have to fall to closer 1% to accommodate this latest cut but the Commonwealth is offering special accounts and five-month savings rates of 2.20% to new customers.

But the bank will only pass on 0.19% of the 0.25% to owner occupied principal and Interest Standard Variable Rate home loans to a new record low rate of 4.93% p.a.

It also increases the pressure on the Morrison government to change the pensioner deeming rate from the impossibly high 3.25%.

Analysts are sceptical about whether banks will be able to pass on all of the reduction due to the impact it would have on their deposit rates, which in many cases would approach zero.

But the ANZ says it is passing on the full 0.25% unlike in June when it failed to do so.

“We looked at a number of factors before reaching this decision, including business performance, market conditions and the impact on our customers,” ANZ retail executive Mark Hand said in a statement. “On balance, we believe this is the right decision for our home loan customers and for our business.”

The CBA will pass on the full 0.25% cut only two groups of borrowers – interest only loans for owner occupied loans and interest only loans for investors.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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