Rates on hold, but further cuts predicted

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The Reserve Bank of Australia (RBA) has kept the official cash rate on hold, but experts are still predicting further action once the economic impact of consecutive cuts in June and July are determined

Yesterday’s decision to hold rates was widely expected, but economists say as many as two more cuts are likely, starting in October or November.

“The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected,” said RBA governor Philip Lowe.

“Long-term government bond yields have declined further and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.”

Mr Lowe said an extended period of low interest rates would be needed to reduce unemployment and “achieve more assured progress towards the inflation target”.

“The board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time,” he said.

On Monday, former prime minister John Howard said he was concerned that the RBA cuts had gone “too far” already, leaving Australia vulnerable to another global crash.

While most believed that rates would hold yesterday, 49 per cent of 46 economists and money experts surveyed by comparison website Finder have tipped a final low of 0.5 per cent and 35 per cent believe the cash rate will bottom out at 0.75 per cent.

“Governor Lowe has placed the RBA in a difficult position by emphasising the view that the unemployment rate must hit 4.5 per cent before sustained wage growth can be achieved. This sets up another RBA rate cut before year end,” said Queensland Investment Corporation (QIC) chief economist Matthew Peter.

After the July cuts, Mr Lowe said the RBA would adjust again “if needed”, inferring that the central bank would be keeping a close eye on the impact of each cut.

“The RBA has indicated its willingness to cut further …” said Associate Professor in economics at Melbourne Business School, Mark Crosby.

When the next cut occurs could become clearer this week once the RBA announces its revised forecasts and the Australian Bureau of Statistics (ABS) releases its June lending data.

The ABS data should reveal whether the first of the RBA’s two 0.25 percentage point cuts had any stimulating effect on key economic areas, including housing and employment.

“The RBA is waiting to see the impact of its June and July rate cuts and the Federal Government’s tax cuts for low and middle income earners and, in particular, it wants to see lower unemployment,” said AMP Capital chief economist Dr Shane Oliver.

While the effects of the rate hold on the economy, employment and housing sectors seems to be the focus, the pause on reducing rates further will give brief relief to retirees relying on income derived from interest rates. However, it seems the effect on retirees is of little concern to most.

“The elephant in the room is the impact rate cuts are having on wealth inequality, specifically with regard to retirees who have seen their standard of living decline along with the earnings from their savings accounts,” said finance expert Peter Boehm.

“At some point, their interests will need to be given more priority when considering rate reductions. I can’t see further rate reductions on their own providing the necessary stimulus to the economy; government spending initiatives must now take on a more predominant role.”

Were you surprised that the rates held yesterday? What will a drop to 0.5 per cent mean to you?

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Written by Leon Della Bosca

Leon Della Bosca is a voracious reader who loves words. You'll often find him spending time in galleries, writing, designing, painting, drawing, or photographing and documenting street art. He has a publishing and graphic design background and loves movies and music, but then, who doesn’t?



Total Comments: 9
  1. 0

    These comments by Governor of RBA,”However, it seems the effect on retirees is of little concern to most.” referring to lower interest rates and eventual impact on ‘Deeming Rates’ for pensioners and self funded retirees. This rhetoric is now common place with this LNP.

  2. 0

    Lucky Labor didn’t win the election, now those who got spooked and got ScoMo in can understand what is happening. Miracle Man ScoMo is screwing over EVERYONE and that smile shows it. Jobs & growth, building a stronger economy. Blah blah blah. So don’t whinge anymore, do your own independent research on how to protect your money. Oh, and don’t trust the banks, they are loaded with your money going down the drain.

  3. 0

    The problem is that the rate cuts are such a big hammer that they hit more nails than the ones required, – the other ones should not have been hit, and yet others should have been hit.
    Of course the problem is a complex one, and the reserve bank has only one simple action, – rate control, – how rate control actions can then help the economy are up to the political parties, to some degree, although they tend to look after themselves before everyone else, the fourth estate, ie the media, although again many of them are directed by their multibillionaire owners, and the self interest of the smaller players, – you and me, – although the big players would like to remove us irritants.
    What is the purpose of a rate cut? – To free up more money so that money goes around and comes around, – essentially puts more blood in the economic body, so the body can be more vigorous and active, producing more, – this will drive investment, because more companies can start and or do more with money to invest, because money is cheaper, – thus producing jobs and spending, that produces more jobs and spending thus producing more jobs and spending and this is basically, it.

    However, there are lots of bottom feeders out there who will snaffle any money they can to do their own thing, – which may not produce more jobs and spending, eg investing in built real estate, – houses do not make anything, so of themselves are not producers, in the way of eg a farm or factory out of which come all sorts of good things so people can thrive, – so money diverted to built real estate is dead money, – it does nothing except make the non-producing property worth more to sell, even though it can’t produce any more than it did already, – usually nil, after all, it is just a place to live.
    New houses, however are an entirely different kettle of fish, – all sorts of products need to be produced from scratch, – nails, wood, roofing, roads, plumbing and electrical connections, – most importantly ., tradesmen and apprentices to put them all in place, – it can be a hive of activity, and a driver of economic growth, – until it is done.
    Then, sure there is a bit of low level economic stuff with Upgrades, parties and the like, but it has then entered the category of Built real estate, creating few new jobs nor much increase in spending.
    Then, is where the danger enters, – for a reason, that area, – or any other area, of built estate becomes seen as desirable, so owners can make money by selling their houses and going elsewhere, – prices skyrocket, large amounts of money changes hands, that whole estate can be worth 10%, 100%, 500%, of what it cost, – however, it proces still nothing, and creates very little money that goes around and comes around in the general economy, – it creates almost no new jobs, nor spending, and becomes just a sinkhole for all the new capital released by the rate cuts, tax reductions, etc. ending up with an enormous value of houses that produce nothing but accumulated sales value, – even if they are never sold.
    Of course there are lots of other ways that money gets accumulated, – bribes, corruption, etc, that may also not produce anything, but this enormous accretion of the economic blood of Australia, in built housing is probably the first we should address, – certainly not feed it any more money from Rate Cuts, – Rate cuts need to be more selective so as to achieve the result they/we want.

    • 0

      Yes Lookfar and the excess and cheap money has also fed into over priced and high share prices and bond prices as well as property prices.

      This is always a consequence when central banks throw cheap money at investors.

      Historically the markets always correct regardless once people realise prices are way out of any intrinsic value. Let’s see if they do this time. A lot of smart money is waiting. You’d have to be a very game punter to buy at current prices and dismal yields.

      It’s the dismal yields that does the damage and the RBA is making that worse every time they lower rates.

      Cashflow on main street is falling, supply is more expensive and demand is collapsing. Does that sound good to you?

      Would you borrow, risk your house to start a business under these conditions? Cheap money can be incredibly risky.

  4. 0

    I am no expert but it appears we are in a recession but no one wants to admit it

  5. 0

    Problem is other countries are also cutting their rates with a zero sum gain for any of them. Why not work on sustainability rather than growth? It’s about time and I think everybody knows it which is why none of these desperate interest rate cuts will work. We’re addicted to growth, lets slow immigration and aim for a 0 growth rate – the world won’t fall apart, but the environment will appreciate it.

  6. 0

    They are busy trying to figure out how to enable negative rates when we still have cash. The current legislation making large cash transactions illegal is proof.

    I’m expecting another banking crisis of the lack of liquidity type we had in the early 70s.

    It may affect house prices as loans become difficult even though rates are low.

    The resulting spending halt as people stop using debt and cut back to prepare for higher food prices as the drought continues is going to play havoc in retail and hospitality.

    Good luck to the LNP. They orchestrated this and now they have to deal with it. All the power is theirs now. Let’s see how good they are. As good as they keep telling us. Prove it.

    • 0

      I agree Rae, no Govt has had to prove anything since the recent recession when Rudd threw lots of money at poorer people, and seemed to have prevented Australia from really suffering from that. – However that is against the current anti Keynesian economic theories.
      Whilst any economic theory, including Keynesian theory, can not be made an absolute, that absolute pronouncements type of thing is IMHO a serious problem.
      These wars between academics in somewhat tarnished ivory towers don’t affect the shoddy inhabitants, generally speaking they follow the new “paradigm”, but they affect all the rest of us, – these bastards, – power without responsibility, – not democracy.
      I admit there is a problem with former Keynesianism, throwing lots of money at any development possibility may produce lotsa Jobs, but destroy the earth, so we are now faced with a different world, where it might be better to make stuff that doesn’t wear out just at the end of the warranty period, but lasts the life of the consumer, so reducing the huge waste problem, reducing the ‘maintenance ‘ part of life where one is always fixing, replacing with new also short life rubbish, – each time to have to learn it’s foibles, fill out waranty forms, take the old rubbish to the tip etc, – such a wasteful life, – and now that we have solar, Wind, Tidal, wave, Bio-energy, geothermal, – on and on, – particularly the direct renewable stuff where we just get energy after we put the wind turbine up, – we get a millon megawatt hours, say, but with coal we have to dig up transport and prepare umpty ump tons of coal, to get the same, – EACH HOUR, – each hour..
      So we get back to Jobs, Renewable Energy is currently generating far more jobs than coal mining in Australia, – particularly as coal mining has become hugely robotic, and that could continue for decades as renewables get installed every where, – but then?
      Coal mines give permanent jobs, renewables only installation jobs, one could argue, but teach a man to fish rather than give him a fish today, – one could argue, teach him to fish sustainably, that then becomes a permanent profession, coal can never, – when the coal is used up it is gone forever, it is not sustainable.
      So where are the jobs? – certainly in looking after the aged, – us, but that is not inspiring to a young person, and lotsa asians can do it far better, but the real challenge is turning Australia’s Renewable energy resources into actualities, – we can power SE asia for a few years, with coal, but by then they may be underwater, – most of their major cities and enterprises are in the river deltas, but we can Power SE Asia for ever with our renewable resources, well what is forever,, but certainly a long time.
      Wow, what a vision, Australia exporting Renewable Energy, – jobs up the Wazoo, so much to do, – just have to extricate ouselves from that very small cartel, the super rich, – Cult, rather, – 36 families? despoiling our earth, our future, our civilisation, as they did in Rome, – we can’t sacrifice our future, our children, our Grandchildren, and beyond, for these egotistic maniacs, and particularly us older Men and Women, – we have learn’t lots in our lives, but that means nothing if we don’t give what we know, – I mean give with no ties, not give with ‘my dada always voted – Blah, – you should also, – that is not giving but Taking.

  7. 0

    Well said, all of you !!



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