RBA cuts to 1.25% and leaves room for more

Alex Druce
(Australian Associated Press)

 

The Reserve Bank of Australia has cut the cash rate to a new record low of 1.25 per cent and has hinted at another move if the jobs market does not improve soon.

The central bank’s first move in any direction since August 2016 followed another month of weak economic data, most notably an unexpected rise in the unemployment rate for April to 5.2 per cent.

RBA Governor Philip Lowe, who last month admitted a rate cut was on the table ahead after the board held fast amid the federal election campaign, said Tuesday’s move should help speed a reduction in the jobless rate.

“It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target,” Dr Lowe said in a statement.

Dr Lowe said there had been few inroads into the spare capacity in the jobs market, but increasing labour force participation, a high vacancy rate, reports of skills shortages and an expected pick-up in wages augured well.

“Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment,” Dr Lowe said.

Hours later Dr Lowe said in a speech that it was “not unreasonable” to expect further rate cuts, although no decision had been made.

Fidelity International portfolio manager Kate Howitt said Tuesday’s cut sent a signal to the markets the RBA had moved into dovish territory and would move to support the local economy.

“With the US Fed in a rate raising cycle, the RBA has today reinforced that its mandate is to manage the domestic economy, not the Aussie dollar,” Ms Howitt said.

The Australian dollar rose against its US counterpart from 69.74 US cents immediately before the decision to as high as 69.93, before easing back to 69.80 by 1530 AEST.

APAC economist at Indeed.com Callum Pickering said consistently low inflation had ultimately forced the RBA’s hand.

“Low inflation does not occur by accident … It is a sign of deep underlying concerns across the Australian economy,” Mr Pickering said.

“(It hints at) a lack of domestic demand, concerns over the capacity of households to spend and invest, particularly with falling property prices”

BIS Oxford economist Sarah Hunter said the RBA was likely to cut again in August as it adjusts monetary policy in to hit inflation targets over time.

“And with global conditions deteriorating markedly and the US heading for a sharper than anticipated slowdown … we think it’s likely that (the RBA) will cut for a third time this year in November,” Dr Hunter said.

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.

NAB analysts said the chances of a further 25 basis point cut in July or August would be complicated by datasets potentially skewed by the federal election campaign in May.

“Anecdotal reports suggest weak retail spending immediately prior to the election, but a decent lift in home buyer enquiry and auction clearances in the weeks after the election,” NAB said in a note.

“The RBA Board will also have to consider that income tax cuts for lower-paid workers which will begin to flow from July 1.”

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