The Reserve Bank of Australia has cut rates to a record low 0.75 per cent following persistent weakness in the labour market.
RBA governor Philip Lowe has repeatedly flagged concerns over excess slack in Australia’s labour force, which has worsened in recent months despite employment generally ticking upwards.
Growing numbers of women and older Australians looking to join the labour force meant unemployment rose to 5.3 per cent in August, even though 34,700 new jobs were added to the economy.
The Reserve Bank hopes cutting interest rates will bring down unemployment and lift inflation.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” Dr Lowe said.
“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,” he added.
But BIS Oxford Economics chief economist Sarah Hunter said the effectiveness of the cut could be hamstrung by the banks.
Speaking to The New Daily, Dr Hunter said banks had already been struggling to match RBA cuts, and will be increasingly unlikely to pass on reductions to borrowers the closer the official cash rate gets to zero.
“Banks passing on these cuts is pretty crucial to the actual impact they have on the economy,” Dr Hunter said.
“So if we don’t see the banks matching it, or they limit how much they pass on to their customers through their mortgage borrowing rates, then that will certainly limit the effectiveness of the cut in stimulating the economy.
“I would expect the banks to pass on some, if not the majority of this cut, but we’ve already seen from the last cash rate cuts that we had in June and July that they didn’t fully pass on the cumulative decline, so it’s unlikely they’ll pass on the full 25 basis point cut.”
Even so, Dr Hunter expects the cuts will have a net positive benefit for the economy, and predicts any further cuts will also help keep the economy moving in the right direction.
She said it would take a negative shock overseas to put Australia’s finances in genuine trouble.
“Right now, what we’re seeing in the economy is just a very sluggish, slow slog – particularly in the US and other developed economies – and it’s just this very soft, weak growth,” she said.
“It’s not a negative, it’s just dodgy – almost like trying to run through mud.”
Opportunity to switch lenders
Borrowers across Australia can expect to feel some relief as a result of today’s cut, according to Kirsty Lamont, a director at financial services comparison site Mozo.
But Ms Lamont said customers of the big four banks would still be paying more than necessary on their mortgage repayments.
“Even if the big banks do pass through 20 basis points of today’s 25 basis point cut – which they are unlikely to do – they would still be a full basis point above the current lowest rate on the market, and that’s before the other lenders have even started cutting,” she said.
“Borrowers should be ready to review their new rate against the best on the market and really take a good, hard long look at their mortgage and consider whether this is the time to move on to a better deal.”
Savers, on the other hand, will be squeezed by the cut, and may need to “jump through some hoops” to qualify for higher interest rates on savings accounts and term deposits.