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RBA hands down August interest rate decision

Pictured: Images suggesting RBA interest rate decision including John Howard, Australian cash and houses. Images: Getty
John Howard has expressed concern that the RBA's consecutive rate cuts leave the Australian economy in a vulnerable position. Images: Getty

The Reserve Bank of Australia has decided to hold the official interest rate at its current record low of 1.0 per cent after cutting in both June and July.

The decision comes as no surprise, with 96 per cent of Finder’s panel of experts and economists predicting the central bank would hold steady for another month..

“The RBA have stressed that further policy accommodation will be forthcoming ‘if needed’. This implies that it would like to assess the impact of its initial 50bp of cuts on the real economy and asset prices before moving again,” Alex Joiner from IFM investors said.

The pause in the cutting will allow RBA governor Philip Lowe time to see how the previous cuts will impact the economy, head of research at property analytics firm CoreLogic, Tim Lawless agreed.

“The housing market has been a key beneficiary of lower mortgage rates, with a trend towards stability over the first half of the year converting to a subtle rise in capital city housing values in July.”

The RBA decision comes as the Australian stock market faces one of its toughest days, with the ASX having plunged 2.9 per cent in early trade amid global trade tensions and fears of a recession.

When will the RBA cut next?

While most experts expected the central bank to wait and see in August, they also predict the next move will be down.

Mortgage Choice’s Jacqueline Dearle pinned October and November as potential months when Australia will see another interest rate cut “based on current economic factors”, bringing rates down to 0.75 per cent.

The Australian National University’s Alison Booth said she expects one by the end of the year, as does St George Bank’s Janu Chan.

And the University of Melbourne’s Mark Crosby said if the RBA hasn’t cut in August, it will likely move again in September or October.

Have we gone too far already? John Howard thinks so

According to former Prime Minister John Howard, the RBA has not left enough gas in the tank for if Australia requires emergency stimulus.

Speaking to the ABC while at a mining forum, Howard said the current 1.0 per cent rate was possibly too low.

“I'm not sure that these interest rate cuts have been the right thing to do," he said.

"I think we've cut interest rates probably far enough already, perhaps too far. But I don't think my advice will be taken."

Continuing, he said Australia came through the GFC relatively unscathed as the central bank had room to move.

"It's a point of view, and I'm not claiming any special expertise, but I think we've gone quite far enough and perhaps too far."

Government needs to look at other ways to stimulate the economy

While the RBA mulls another rate cut, it has also called on the government to find other ways to boost a lagging economy.

“As a country, we should also be looking at other ways to get closer to full employment. One option is fiscal policy, including through spending on infrastructure," RBA governor Philip Lowe said in June.

"Another is structural policies that support firms expanding, investing, innovating and employing people. Both of these options need to be kept in mind as the various arms of public policy seek to maximise the economic prosperity of the people of Australia."

The Coalition government in July passed its controversial tax cut package which is designed to stimulate the economy.

However, social advocacy group ACOSS has also argued an increase to the minimum wage and Newstart allowance would strengthen the economy and reduce poverty.

“We know that raising the rate of Newstart is the most effective way to reduce the persistent rates of poverty in our wealthy country,” ACOSS director of policy Jacqui Phillips said in late June.

“In fact, raising Newstart is a far more effective way to grow the economy than the government’s high-end tax cuts in 2022 and 2024, which mostly go to high-income earners, who will likely save much of the extra income they receive. The highest 20 per cent of households by income save one third of their income, because, unlike people on much lower incomes, they can.”

She said it was time for the government to include lower income workers in the economic debate.

The Reserve Bank will hold its next board meeting on Tuesday 3 September.

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.

The outlook for the global economy remains reasonable. However, the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside. In most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.

Global financial conditions remain accommodative. 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. 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.

Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices. Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario is for the Australian economy to grow by around 2½ per cent over 2019 and 2¾ per cent over 2020. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.

Employment has grown strongly over recent years and labour force participation is at a record high. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The unemployment rate is expected to decline over the next couple of years to around 5 per cent. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

The recent inflation data were broadly as expected and confirmed that inflation pressures remain subdued across much of the economy. Over the year to the June quarter, inflation was 1.6 per cent in both headline and underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2 per cent. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.

Conditions in most housing markets remain soft, although there are some signs of a turnaround, especially in Sydney and Melbourne. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing 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.

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