RBA governor Glenn Stevens said very subdued growth in labour costs domestically and very low cost pressures globally meant inflation was expected to remain quite low for some time.
“The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting,” Stevens said in a statement on Tuesday.
The RBA’s decision to lower the cash rate by 25 basis points this afternoon is expected to provide retailers with a much needed boost to sales, according to the Australian Retailers Association (ARA).
ARA Executive Director, Russell Zimmerman, said that while it may take a few weeks for consumers to adjust their levels of spending, he is hopeful that the downward movement of interest rates to its lowest ever will help to halt the slides in retail sales growth of the past few months.
“Retail spending growth has fallen since the beginning of 2016, with some states, such as Queensland and Western Australia suffering with almost stagnant growth,” said Zimmerman.
“This reduction of interest rates will allow consumers greater access to discretionary cash, which we anticipate will result in Australians returning to stores. It’s been a difficult few months for many Australian retailers, particularly those in food retailing and household goods.
“With the Election now wrapped up, we’ve seen some consumer confidence return, and combined with this new drop in interest rates, we’ll be watching for a recovery as the Christmas period – retail’s most crucial period – grows closer,” Zimmerman said.
JP Morgan chief economist Sally Auld said the RBA was reacting to weak inflation, but trying not give any indication of its next move.
“These guys have confirmed that inflation remains quite low,” she told AAP.
“That was where the cut came from and I think from here these guys sit back and wait. The next question they need to address is how persistent this period of low inflation is going to be.”
Commonwealth Bank managing director of economics Michael Blythe said as the focus was clearly inflation, the Reserve Bank may not be done with one cut before the end of the year.
“I expect, as we see the RBA’s inflation forecasts on Friday, they will still show inflation remaining extremely low and keep alive the prospect of another rate cut later this year,” he told AAP.
“We’ve had two cuts in our forecast for while.
“We’ve just had the August one and we think there’s a good chance of another one in November.”
NRA CEO, Dominique Lamb, said the RBA’s decision would help achieve the Bank’s goal of supporting domestic demand, particularly in the retail sector.
“We are mindful that an interest rates cut can have be double-edged sword, given that the RBA has clearly indicated it is concerned about some slowing in the economy overall,” said Lamb.
“However, lower borrowing rates will flow through to more money in the pockets of consumers, giving them greater discretionary spending power.
“This in turn will boost the retail sector, which is one of the nation’s largest employers – particularly for lower-skilled and part time workers.
Lamb said there is little lead time required for retailers to increase staff hours or their number of employees when they are seeing additional spending by consumers.
“So a jump in consumer demand from a rates cut can lead very quickly to increased activity in the labour market.
“We welcome the RBA’s decision, and we call on all lending institutions to now pass the benefits along to their customers – both for home loans and for credit cards,” said Lamb.
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