Finance Finance News Dollar hits decade low after RBA cuts rate to 0.75pc to head off rising unemployment

Dollar hits decade low after RBA cuts rate to 0.75pc to head off rising unemployment

The RBA's optimism of June has faded as COVID-19 wreaks its havoc on the economy. Photo: AAP
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The Reserve Bank has driven its official cash rate below 1 per cent for the first time as it battles to head off rising unemployment and stimulate a stalling economy.

The cut – of 25 basis points to 0.75 per cent on Tuesday – is the RBA’s third cut since June and comes after jobs data showed the unemployment rate had risen to 5.3 per cent from 4.9 per cent at the start of the year.

The move came as little surprise, with markets pricing in an 80 per cent chance of a cut following recent speeches from RBA Governor Philip Lowe, highlighting concerns about not only low wages growth and unemployment but the impact rate cuts overseas could have in driving up the Australian dollar to uncompetitive levels.

The big banks passed on about 80 per cent of the 50 basis points of cuts in June and July, but are expected to hold back more this time.

More cuts in the pipeline

Dr Lowe said in a statement accompanying the decision more work may need to be done to support the economy.

“The board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time,” Dr Lowe said.

Earlier this year the RBA confirmed it was looking to drive the unemployment rate down to 4.5 per cent, a level which it considers to be “full employment”.

The RBA has also been frustrated by its inability to lift inflation, which has consistently undershot the 2 to 3 per cent band for more than three years.

“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target,” Dr Lowe said.

“The board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes.”

Home loans start falling

A number of small lenders slashed their variable home loans within minutes of the decision, leaving the bigger banks in their wake.

Homestar Finance and Athena Home Loans both passed on the full 0.25 per cent, while Reduce Home Loans cut its lowest variable rate by 0.20 per cent, but for new customers only.

But RateCity chief executive Paul Marshall said with rates already so low, some banks will find it hard to pass the cut on in full.

“It’s a juggling act between the interests of savers, borrowers and shareholders, especially now interest rates are in uncharted territory,” Mr Marshall said.

On RateCity figures, the average home owner with a $400,000 mortgage could save up to $57 a month and $682 a year if the 0.25 rate cut is passed on in full.

Treasurer Josh Frydenberg urged banks to pass on the rate cut. Photo: AAP

Treasurer Josh Frydenberg urged the banks to pass on the rate cut in full.

“It is the government’s expectation that the banks will pass on this 25-basis-point rate cut in full,” he said.

“What this means for an Australian family with a mortgage of $400,000 is $720 less a year in interest payments. That’s a significant benefit to an Australian family.”

Shadow Treasurer Jim Chalmers said the economy was struggling under the Coalition’s watch.

“When Australians are struggling, when growth is the slowest it’s been for a decade, when wages are stagnant, the government is leaving all of the heavy lifting to the bank,” Dr Chalmers said.

“Interest rates [are] a quarter of what they were during the global financial crisis.”

Dollar slides towards decade low

CBA chief economist Michael Blythe said the RBA’s statement hints at more cuts in the pursuit of full employment.

“While today’s cut had been well telegraphed, the debate about the desirability of the move has heated up,” Mr Blythe said.

“Our view for a while now has been that interest rate cuts are of limited use.

“Households tend to leave their home loan repayments unchanged, so little additional spending power is unleashed, the potential boost from a lower Australian dollar is limited by still-high commodity prices and the move to a current account surplus and the negative impact on business and consumer confidence,” he said.

Mr Blythe noted the RBA was growing increasingly anxious about the global economy, a theme common to all central banks at present and underlies the shift from rate rises in 2018 to rate cuts in 2019.

“The global race to the bottom is, in a sense, dragging the RBA along. Failure to participate could see the Australian [dollar] move higher.”

The RBA would no doubt be somewhat pleased with the market’s reaction to Tuesday’s announcement.

After an initial spike, the dollar started retreating down to a decade-low 67.0 US cents (at 4.20pm AEST).