The RBA has slashed the interest rate again as the Australian economy weakens

Will rate cuts be enough alone? (Photo by Milos Bicanski, Getty Images)
  • The Reserve Bank of Australia (RBA) has again cut the official interest rate at its October meeting, in line with consensus.
  • More than three in four economists, including all of the big four banks, had anticipated the cut from 1% to 0.75%, after a month of data indicated that weakness remains in the Australian economy.
  • As the unemployment rate refuses to move lower, wage growth — one of the RBA’s key concerns — looks a long way off. Without it spending growth, and a stronger economy, as a result, looks unlikely to manifest.

The Reserve Bank of Australia (RBA) has cut the official cash rate once again at its October meeting on Tuesday.

The RBA was widely expected to cut the interest rate from 1% to 0.75% in a further effort to support the ailing Australian economy and offset overseas risks.

“While the outlook for the global economy remains reasonable, the risks are tilted to the downside,” RBA governor Philip Lowe said in his statement from the October meeting.

“The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans because of the increased uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low.”

More importantly and closer to home, growth in the Australian economy has been anemic.

“The Australian economy expanded by 1.4 per cent over the year to the June quarter, which was a weaker-than-expected outcome,” Lowe said.

That’s despite the long-held expectation of the RBA that stimulus will support higher levels of growth. In Tuesday’s statement, the RBA maintained its optimistic tone.

“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector should all support growth,” Lowe said.

That expectation has repeatedly been frustrated by rising unemployment — despite strong job creation — sluggish wage growth and the refusal of the Australian government to increase its own spending.

“The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending,” Lowe said.

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It marks the third cut this year after it began slashing rates in June. The 0.25% cut on Tuesday brings the official interest rate to 0.75%, half of the 1.5% it was at in May — a level at which it had sat for more than two years.

More than three-quarters of economists, including all of the big four banks, told Bloomberg before the decision that they anticipated a cut. The remainder had expected the RBA to keep rates on hold until at least November.

For the RBA’s part, it hinted in its statement on Tuesday that more cuts could be on the way.

“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,” Lowe said.

The consensus view has been that the RBA will cut again in February to bring the official cash rate to just 0.5%. IFM chief economist Alex Joiner, however, predicts another cut will follow in November at the RBA’s next meeting.