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Record-low interest rates aim to boost spending

The Reserve Bank on Tuesday cut the official interest rates to a new record low of 0.75 per cent in a bid to drive up wage growth and reduce unemployment.

The new record low of 0.75 per cent is the third cut this year, and the first time rates have dipped below 1 per cent, but AMP chief economist Shane Oliver said the Reserve Bank’s work isn’t done yet.

“They want to get the economy humming faster, I don’t think this will be enough – it will help (though),” he told Sky News.

He predicted rates will drop again to 0.5 per cent on Melbourne Cup Day, and down to 0.25 per cent early in 2020.

Executive director of the Australian Retailers’ Association Russell Zimmerman said he was hopeful the decision to further cut interest rates would boost retail sales by easing pressure on household budgets.

“We haven’t seen the jump in retail sales we were hoping for, and we are still waiting to see the flow-on effects of earlier rate cuts, tax cuts, and increases to the minimum wage,” Zimmerman said.

“Retail trade figures in recent months have continued to lag but we keenly await the release of August retail trade figures to see whether the other stimulatory measures have kicked in,” he added.

Divide over how to boost economy

Treasurer Josh Frydenberg said the RBA cut rates to bring Australia into line with other low-rate economies, as well as to pursue its goals of cutting unemployment and lifting wage growth.

“The board has made clear in its statement today the domestic economy has reached a gentle turning point and they positively referred to the benefits that are flowing from the tax cuts, which are the most substantial in more than two decades,” he told reporters in Sydney.

But Labor shadow treasurer Jim Chalmers said the government was pretending it had no options to lift the flagging economy.

“If they were so good at managing the economy the Reserve Bank wouldn’t have had to cut rates again today,” he told reporters in Brisbane.

Deloitte Access Economics partner Chris Richardson says there are downsides to cutting rates so low.

“There is a risk that we’re spending down our recession insurance,” Richardson told Sky News before the cut was announced.

Frydenberg said the best way to avoid recession in a future global downturn was to pay down debt, giving the government more capacity to spend through it.

Banks urged to pass on rate cut in full

The Australian Chamber of Commerce and Industry urged the banks to pass on the rate cut in full to lift spending on retail.

“Small businesses have been doing it tough over the past year. This has particularly affected discretionary spending in small retail businesses, including cafes and restaurants,” chief executive James Pearson said.

The Commonwealth Bank was the first of the big four banks to trim its interest rates in response to the RBA’s move.

However, while CBA cut its standard variable rate for home loan customers by between 0.13 and 0.25 per cent it did not match the RBA’s cut completely.

The other big banks are expected to follow CBA’s lead in the coming days.

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