What does the record RBA cut mean for the economy?

Alex Burke,  Senior writer,  No More Practice Education

On Tuesday, the Reserve Bank of Australia reduced the cash rate by a quarter of a percentage point to 1.25% - the lowest it's ever been.

Explaining the decision, RBA Governor Philip Lowe said that the cut came after two-and-a-half years of keeping the rate steady.

So, why was it done?

"At its core," he explained, "today's decision was taken to support employment growth and to provide greater confidence that inflation will be consistent with the medium-term target."

He clarified that the rate cut shouldn't be seen as a response to further deterioration in the Australian economy since early May - in fact, he said, the economy's outlook remains "reasonable."

Lowe said the main risks to the economy are intensifying trade disputes, but that despite this, "Australian economy is still expected to strengthen later this year, supported by the low level of interest rates, a pick-up in growth in household disposable income, ongoing investment in infrastructure and a brighter outlook for the resources sector."

Treasurer Josh Frydenberg said the cut would be "welcome news for Australian households and businesses and it will mean lower mortgage costs and lower interest payments."

While there has been some speculation that the RBA’s decision reflected increasing anxieties about the state of Australia’s economy, UBS Asset Management’s head of fixed income and investment solutions, Anne Anderson, says it was a “pragmatic and smart” move.

“It will be easing supply of credit,” she says, “which is a good thing. We’ve seen the recent tax cuts, and the RBA still has capacity. I’m sure if the economy was so weak at the same time as cash rates going lower and an increase in fiscal stimulus, the Aussie dollar would be lower than it is.”

Referencing concerns about Australia’s vulnerability to overseas trade wars, she says “I’m not saying we’re immune, but we have a set of exports that make us less vulnerable, and we have a trade surplus with the US. Some of our biggest exports are education and tourism, which are not exposed to the obvious trade war as countries in Asia or Europe, where you have semiconductor development and the auto industry.

“There’s downside risk, sure, but housing is showing signs of stabilising as well and with tax cuts and interest rate cuts, that allows room for rebalancing.”


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