Summary
And that’s where we will leave the blog for today. The full report is coming up – with more updates and reaction.
To recap:
- The Reserve Bank cut the cash rate to a historic low of 1%.
- The RBA governor, Philip Lowe, sounded an optimistic note, saying Australia’s growth was “on-trend” and job growth was strong.
- But low household spending was the big worry, due in part to low wages growth.
- The Australian dollar stayed static and the ASX 200 hovered near where it opened – despite a big spike when the cut was announced.
- Labor and the ACTU called on the government to act to increase wages.
- Experts are still predicting another cut later this year, and possibly one more at the start of 2020.
And Lowe will be making a speech in Darwin at 7.30pm AEST when he will provide more information. Thanks for reading.
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Here’s analysis from Stephen Koukoulas:
Philip Lowe mentioned a few positive points for the economy, which suggests it will likely pause for a few months before seriously considering further interest rate moves.
In particular, Lowe noted “the outlook for the global economy remains reasonable”, which is shorthand for a broadly neutral influence from overseas to Australia in the near term. This looks a fair assessment.”
In 2018 the RBA was starry-eyed about the economic outlook as well as using monetary policy to act as a brake on house prices and household debt. It also was of the view that steady interest rates were a sign of financial stability, even as economic conditions faltered.
These errors and misjudgments have cost tens of thousands of jobs, with the unemployment rate rising, underlying inflation hitting record lows and annual wages growth stalling at a little above 2%.
The RBA is now playing catch up...A lot will depend on factors outside its control including tax policy and other possible pro-growth measures from the Morrison government, what happens in the global economy and, in particular, whether the recent strength in commodity prices and the terms of trade can be sustained.
Westpac’s market update is in, and it is bad news for bonds.
“AU bonds reacted slightly positively on the initial announcement but quickly gave up those gains to be largely unchanged,” the analyst Damien McColough says.
“Under Westpac’s forecast for RBA & Fed policy we have now reached the maximum inversion of AU cash versus the US (137.5bp). Should we be proved correct, the relentless AU bond outperformance that has been a feature of the past almost two years has probably run its course.”
And he says to keep an eye on the employment data, and the situation in Canberra.
“By stating that a further rate cut would be delivered only ‘if needed’, the RBA has sent a message that is less dovish than at the time of the June rate cut. That means that they (and the market) will be even more sensitive to the evolution of the data over coming weeks, especially as the statement implies that they have maintained their more positive outlook for the economy.
“We think that the market will be more reactive to any updates on fiscal policy, especially the passage through Parliament this week of the Government’s tax reforms.”
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Some more movement – the lowest variable rate available is now officially 2.89%.
This is from Reduce Home Loans, which RateCity said had previously offered the lowest variable rate (3.09%).
But, that’s still not the full rate cut. It’s a reduction of 0.2 percentage points. Bargain hunters would have been disappointed – they were hoping for 2.84%.
Three small lenders have moved and passed on the full cut – according to RateCity.
They are Athena, Resimac and State Custodians. The first comes into effect today, the last two, not until 24 July.
Aussie dollar static
The Aussie dollar has hardly moved in the wake of the RBA’s decision.
You’d normally expect lower rates to push the local currency down but the lack of reaction shows that the move was, as they say in the markets, already in the price. The Aussie stands at US69.78 at the moment.
Some stats:
- This is the first back-to-back rate cut since 2012.
- Australia now has the sixth lowest interest rate in the world.
Anthony Doyle from Fidelity International says this is only 0.25% above the UK, which is currently in a bad spot “bearing the brunt of uncertainty over its future trading status with Europe”.
He expects another cut by December. “The unemployment rate will be a key indicator,” he says. “In coming months, Governor Lowe and the RBA will likely continue to call on federal and state governments to support growth going forward through both fiscal easing and structural policies designed to support job growth.”
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And as we cast into the future, Marcel Thieliant from Capital Economics is predicting more rate cuts.
He says it will fall to 0.5% by early 2020.
“We still expect the unemployment rate to climb to 5.5% by end-2020, which will keep a lid on underlying inflation,” he says. “The upshot is that we reiterate our forecast that the RBA will slash interest rates to 0.5% by early next year.”
How have the markets reacted?
The ASX 200 is currently at 6,648 points, about the same it was at the start of business.
But that’s a decrease on the middle of the day, when it was 6,667 before the announcement. There was a spike in the index immediately after the news – surging to 6,684 – but it has now come back down.
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We’re still waiting to see which banks will move and cut their variable mortgage rates, and which won’t.
RateCity’s Sally Tindall says the new lowest rate on the market could be 2.84%.
But she is not expecting the big banks to pass a lot of the cut on. In fact, “a lot of variable rate customers might find they get short-changed” at the end of today.
“Call your bank and find out what they intend to do,” she says. “If you’re an owner-occupier paying down your debt, and you’re on a rate higher than 3.5% after this cut, you might not be getting value for money.”
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The ACTU secretary, Sally McManus, says the government should act to boost wages – again picking up on Lowe’s comments about low wage growth.
“Low wage growth is holding our economy back,” McManus says.
“Working people have gone without fair pay rises for six years... People are digging into their savings if they even have any. Many have nothing left to spend and it’s causing our economy to break down.”
She says there are three things the government should do: reverse the penalty rate cut (which came into effect yesterday), give public sector workers a pay rise and commit to a living wage, one of Labor’s election platforms.
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Labor: Cuts show government mismanagement
Labor’s shadow treasurer, Jim Chalmers, is first out of the blocks with his statement.
“If the Liberals were doing such a good job managing the economy, the Reserve Bank wouldn’t have had to cut the cash rate for two months in a row,” he says.
Chalmers says Lowe’s statement about consumption growth and wages being low is the key.
“[It] bolsters the case for Labor’s tax cut proposal to get more money into workers’ hands sooner.
“Two rate cuts in two months are a damning indictment of the Liberals’ economic mismanagement. Interest rates are now a third of what they were during the depths of the global financial crisis.”
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Speaking of “strong competition” out there for good borrowers, Mozo’s director, Kirsty Lamont, says homebuyers should shop around for mortgage providers.
But like RateCity’s analysts said earlier, Mozo doesn’t see the big four passing on the rate cut in full.
“Unlike last month, they’re likely to hold back more of the interest rate relief and fire up the money presses,” Lamont says.
She says ANZ and Westpac saved $193m, projected over the year, by holding back some of the cut last month. And all the banks also delayed the date of the cut – which then saved them all $108m.
Last time, 47 lenders passed on the cut in full, 32 passed on part of it and seven didn’t pass it on at all.
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Some more takeaways from Lowe’s statement.
The main message is that the outlook for Australia “remains reasonable”, and he is predicting on-trend growth.
He says the main worry is how Australia’s consumption growth has slowed, due to low wage growth and falling house prices. But increased infrastructure investment is “providing an offset”.
Jobs growth is looking “strong”. “Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas,” he says.
“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 strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low.
“A further gradual lift in wages growth is still expected and this would be a welcome development.”
The housing market “remains soft” but there are signs of stabilisation in Sydney and Melbourne. Demand for credit, he says, is still “subdued”. Mortgage rates are at record lows and Lowe says there is “strong competition” among the banks for good borrowers.
The aim is for inflation to be 2% in 2020, and higher after that, and we are on track, he says.
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Philip Lowe, the RBA governor, says the cut was to “support employment growth” and generate “greater confidence” in the Australian economy.
In his statement, available here, he said the “outlook for the global economy remains reasonable”, but uncertainty (in a large part due to the China-US trade dispute) had “affected investment”.
Australia’s economy has grown at a “below-trend” 1.8% in the March quarter, but employment growth “has continued to be strong”.
“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” he said. “It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”
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IT'S A CUT
And there we have it. The Reserve Bank has cut interest rates to 1% – the lowest rate in history.
That’s a 0.25 percentage point drop – down from 1.25%. And it’s two cuts in a row, after the RBA cut the rate, in June, from 1.5% to 1.25%.
Back in May, Westpac’s senior economist, Bill Evans, predicted three cuts this year.
He forecast a cut for June (which happened), a cut in August and one in November – bringing the rate down to 0.75%.
But note – this meant Evans predicted a hold for this month. As reported previously, competitors Nab and ANZ disagreed, thinking a cut was coming today. Let’s see.
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Analyst Tom Godfrey, from money-saving site Mozo, has crunched the numbers on the – as of now hypothetical – rate cut.
If (a) the RBA cuts today and (b) the banks pass it on in full, the average variable home loan rate will be 3.87% – down from 4.06%.
For the average loan ($400,000 as owner occupier paying principal and interest) this would be $57 saved a month. And you can add that to the $58 saved from the rate cut in June.
But since 2016, Godfrey estimates that the big four banks, by not passing on every cut in full, have made nearly $4bn in additional revenue, which shakes out to be $360m a month.
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Despite the overwhelming likelihood of at least one more cut this year, some experts believe that the RBA has lost its way and that cutting the cash rate will hinder rather than help the economy.
The head of the Bank of International Settlements – the central bank’s central bank – warned this week that the growing reliance on monetary policy (ie interest rates) to manage economies was creating a spiral of diminishing returns which could result in an even bigger correction than the one seen after the Lehman collapse in 2008.
Agustín Carstens said that the policy of ultra-low rates around the world had encouraged investors to inflate assets everywhere and “many vulnerabilities have built up and could throw the global economy off course”. He also said that low rates had weakened banks and left them less well prepared to face another crisis if the asset bubbles popped.
He called on governments to use tax reforms and infrastructure spending – known broadly as fiscal measures – to tackle economic weakness.
Seven out of 10 economists surveyed by Reuters think the RBA will cut the cash rate to 1% today.
It is also likely that many of those who think the RBA might not go today think that a cut in August would then be inevitable.
NAB economists Alan Oster, Ivan Colhoun and Kieran Davies voiced a typical opinion when they said they could not see a need for the RBA board to sit on its hands while the economy – despite yesterday’s news about house prices showing signs of recovery – was stagnating.
“There is not much separating July from August given the time it takes for policy to have an effect on the economy, but we do not see a need for the board to wait,” NAB said.
ANZ also said last week that it expects a cut.
Which banks will pass on the cut? The question on everyone’s lips – if they have a variable rate mortgage.
Last time, Commonwealth and NAB passed on the full 0.25 percentage point cut, but Westpac and ANZ didn’t.
Analysts from finance site RateCity don’t expect the full cut today to be passed on again – at least not by the big four.
“The closer the cash rate gets to zero, the more banks will start feeling wedged,” RateCity’s Sally Tindall says. “Wholesale funding costs might have come down but banks are trying to juggle deposit rates, lending rates, business costs and profit margins in what is an incredibly sluggish credit market.”
If your bank doesn’t budge as much as you’d like, Tindall says the market is very competitive, and you can get a good deal with a smaller provider with a new customer offer.
“While hundreds of thousands of existing mortgage holders missed out on a full cut last month, competition for new business is actually intensifying.”
Last time, the lowest rate on the market actually fell 0.35 percentage points – more than the cut.
“Check out what other lenders are offering,” Tindall says. “If you’re determined to get a decent rate cut, you might have to be prepared to switch.”
Updated
The prospect of lower rates has put a bomb under the ASX200 in recent weeks and the index has climbed again today 12 points to 6,667 points. The all-time high of 6,828 set in November 2007 is increasingly in sight.
Signs of a possible trade deal between the US and China have also buoyed optimism and last night the S&P500 index on Wall Street closed at a record high.
Perhaps in a sign that a rate cut is not nailed on, traders pushed the Aussie dollar slightly higher today at US69.78c.
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What will happen?
Hello everyone and welcome to our liveblog of the Reserve Bank’s July interest rate decision.
We’ll find out at 2.30pm AEST. Will it be another cut? Another record? The current rate is 1.25% – the lowest in history – after the RBA cut it in June.
Experts are predicting another cut – taking us down to, well, the new lowest rate in history.
But we’ll see. Stay with us for the next two hours. We’ll have analysis, reaction and explainers for what this means for you, your mortgage, and the economy.
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