Economy

RATES SLASHED: RBA cuts cash rate to 1 per cent

RATES SLASHED: RBA cuts cash rate to 1 per cent

"If the RBA were to lower the cash rate to 0.5 per cent and still be dissatisfied with the excess spare capacity in the labour market, then we expect that they will consider putting pressure on governments to loosen fiscal policy, as well as exploring other alternative policies that the RBA itself can embrace", he said.

The RBA on Tuesday cut the official cash rate to a fresh record low 1.0 per cent and left the door open for another before Christmas as global trade uncertainty and low wage growth continues to weigh on inflation.

According to Lowe, the decision to lower the cash rate will help reduce the unemployment rate, which has grown to 5.2 per cent.

Lowe argued that the pace of economic growth needs to accelerate to tighten the job market and the rate cuts could bolster wage growth and restore inflation back to the target band of 2% to 3%.

The RBA's decision to cut rates for a second consecutive month induced an AUD rally from levels near US$0.697 to US$0.699. "Frankly, two cuts might not be either, but it's a step in the right direction and it's great news for homeowners".

The decision from Westpac means that it was the only major bank not to pass on a full 25 basis point cut to its customers following either the RBA's June or July interest rate drops.

Of course, the Australian Dollar to US Dollar (AUD/USD) exchange rate could also be driven by any notable developments in US-China trade relations.

Dr Lowe said while the Reserve Bank's monetary policy framework was centred on the inflation target, the ultimate objective was to promote the collective economic prosperity of Australia.

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'Aussies could be excused for thinking that there are no trade frictions in the global economy at present because, from our standpoint, conditions have never been better.'

It's going to be good news for mortgage holders.

Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have over capital flows, and their allure for short-term speculators. On Monday, Treasurer Josh Frydenberg said "we do expect" the banks to pass any cuts on in full - but experts warn that's unlikely as margins get squeezed the closer rates go to zero.

And while households would no doubt welcome the reduced payments, real estate commentators said lower rates would offer homeowners additional support by propping up the housing market.

"For us, the key message from this is that the RBA must be quite anxious about growth - back-to-back cuts suggest they have felt a sense of urgency", said HSBC chief economist Paul Bloxham.

About 10 million middle- and low-income earners will receive a rebate worth up to A$1,080 per person should the legislation pass this week.

A rate cut has already been ~82% priced in so I reckon there isn't much scope for the aussie to drastically fall unless the RBA sends out a dovish signal by committing to further cuts down the road (next one likely to only be in November). "Before the GFC, typically cuts were passed on in full but we've seen many times since that isn't necessarily the case", he said.


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