Australia's central bank cuts interest rates for second time

Ann Santiago
July 4, 2019

The move, which was expected by markets, came as "the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside", governor Philip Lowe said.

While Tuesday's announcement might be good news for the country's mortgage holders, and welcomed by government and businesses looking to borrow money, the decision to slash interest rates to an all-time low does not paint a particularly good picture for Australia's economy at the moment.

While the RBA hopes to improve consumer spending through cutting interest rates, the Coalition government is working on passing its proposed $158 billion income tax cuts to deliver up to $1080 to Australian taxpayers that earn up to $126,000.

Lowe argued that the pace of economic growth needs to accelerate to tighten the job market and the rate cuts could bolster wage growth and restore inflation back to the target band of 2% to 3%.

However, the bank seems to have already hinted that this recent cut would be the last one for a while, an industry observer said. "Frankly, two cuts might not be either, but it's a step in the right direction and it's great news for homeowners". "Savings rates have been cut substantially over the last few years, significantly more than cuts to mortgage rates".

In other currencies, the Australian dollar rose 0.3% against the USA dollar to US$0.6986 AUD= after the RBA lowered interest rates by 25 basis points to a record low of 1.00%, matching economists' expectations.

The U.S. dollar index was little changed at 96.790 on Tuesday having posted its biggest increase since March 7 on Monday on hopes Beijing and Washington were making headway in their trade negotiations.

"Bank lending conditions remain pretty restricted and because the economy is soft, wages growth is going to remain soft which will put a ceiling on price growth", he added.

The Aussie could dip below $0.6950 after the RBA's decision around 0430 GMT but would likely stabilise as traders await Lowe's comments expected 0930 GMT, Attrill said. The cash rate now sits at one per cent - the lowest on record.

Other specialists argued that interest rate cuts have been already priced in, therefore they should have a limited impact on the currency.

And the big banks weren't slow to hang around, with ANZ announcing its decision to pass on the full 25 basis point cut to owner occupier and investor customers just hours after the RBA's decision.

"Thirdly, inflation is insipid across Australia - 1.4 per cent inflation".

"We're seeing the Australian dollar decline over time because of gradually worsening economic data, despite benefiting off really high iron ore prices", he said.

The return to growth suggested real estate markets in both cities were on the verge of bottoming out, preventing a further erosion in household wealth tied up in the family home, Mr Lawless said. "Before the GFC, typically cuts were passed on in full but we've seen many times since that isn't necessarily the case", he said.

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