The Reserve Bank’s decision to cut the official interest rate to the lowest point in over 50 years has been welcomed by economists and business groups, although they warn it may precede lower growth targets in next week’s federal budget.
The RBA made the unexpected move of cutting interest rates by 0.25 percentage points to 2.75% – the lowest point since 1959.
It said the cut was needed to encourage growth, particularly in non-resources sectors – and experts suggest another cut may be in order within the next few months.
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JPMorgan chief economist Stephen Walters told SmartCompany the main reason motivating the RBA’s decision was the continuing “transition” between the mining investment boom and growth in other sectors of the economy, such as construction and manufacturing.
“There is less confidence in the way it is evolving, largely because of the high Australian dollar, which impacts manufacturing and tourism in particular.”
AMP Capital Investors chief economist Shane Oliver told SmartCompany the fade-out of the mining boom and the high Australian dollar most strongly influenced the RBA.
“Some people have expressed surprise, but the reality is that while the economy has responded to lower interest rates, the response has been subdued.”
“The RBA is trying to compensate for the high dollar. Inflation is subdued when the dollar is high, but by mentioning it specifically in the announcement yesterday it’s clear they’d like to see it fall,” he says.
Housing Industry Association chief economist Harley Dale told SmartCompany it’s encouraging the banks have been adopting the full cut.
“This is good for confidence and we’d like to see them cut even further, but we have to be realistic. The announcements seem to relate to standard variable mortgage rates, so we’re not sure if it will be passed onto business at this juncture.”
So far, NAB, Commonwealth Bank and Westpac have announced cuts to variable mortgage rates. ANZ will wait until its scheduled monthly announcement on Friday to confirm any changes.
Oliver, Dale and Walters agreed a further rate cut is likely, possibly as early as next month.
“I think they will go lower to 2.5%. It could be next month, but it depends on what we see in the budget,” Oliver says.
In a statement, CommSec economist Craig James said the RBA has decided to “do what it takes” to lift economic growth. As a result, “further official rate cuts remain on the table”.
“If the Reserve Bank was to cut rates in the next few months it would likely be prompted by confirmation that inflation is contained, further evidence that the Aussie economy was tracking sideways, fresh global turmoil, especially combined with evidence of weaker US and Chinese growth, and a resurgent Australian dollar.”
Industry sectors are generally welcoming of the change, with Australian Industry Group chief executive Innes Willox saying in a statement the RBA’s decision is a “timely move to stimulate the slowing economy”.
“Alone, this will not act as a silver bullet to boost demand, but it is a welcome step to stimulate economic activity.”
The Australian Chamber of Commerce and Industry also applauded the RBA’s move and chief executive Peter Anderson said in a statement the rate cuts should improve business outlook and benefit small businesses if the banks pass on the full cut.
“There is no justification for not passing on the full 25 basis point cut in rates.”
ACCI says the banks need to pass on the cuts so as to help restore confidence and provide businesses and households with the full benefits.
“The predicament of small business is too big to ignore and their rights to now get this rate cut passed on immediately and without clawback is fundamental to a fair go,” he says.