The Reserve Bank will have another throw of the dice trying to get the economy firing again with financial markets predicting a cut in the official interest rate to a new record low this week.
The central bank will hold its monthly board meeting on Tuesday where a cut in the cash rate to 0.75 per cent from one per cent is expected to be endorsed – the third reduction this year.
Treasurer Josh Frydenberg refused to be drawn on whether the Reserve Bank would reduce rates again.
“But obviously we’ve seen our interest rates come down quite substantially, so too the interest rates right around the world,” he told Sky News on Monday.
“The impact of that has been to help stabilise the housing market, where clearance rates are now above 70 per cent in the major markets of Sydney and Melbourne, whereas they were around 50 per cent this time last year.
“We’ve also seen prices rise after a period of consecutive months where they fell.”
The treasurer is keen to maintain a “wait and see” approach.
“As a government, we’re responsible for fiscal policy, and they’re responsible for monetary policy,” Mr Frydenberg said.
Reserve Bank Governor Philip Lowe in a speech last week said while he is optimistic the economy has seen a gentle turning point, it was not unreasonable to expect a further easing in monetary policy.
He is concerned there are increasing downside risks to global growth, weaker than expected domestic growth, a rising unemployment rate and a stalled pick-up in wages growth.
“We remain of the view that the RBA will cut rates again on Tuesday and now see the low point being 0.25 per cent in February next year,” AMP Capital chief economist Shane Oliver says in a note to clients.
However, there are doubts that a further reduction will provide a much needed lift to economic growth, which was struggling at a decade low of 1.4 per cent in the year to June.
Business Council of Australia chief executive Jennifer Westacott agrees with former Liberal treasurer Peter Costello, who believes the economy needs tough reforms rather than cheaper borrowing costs.
“(Rate cuts are) not going to change the trajectory of business investment and it’s business investment that we need to actually fire up,” Ms Westacott told Sky News.
She said business investment is at its slowest since 1994 as a proportion of the economy and that’s what drives productivity and wages growth.
With tax cuts for large businesses off the table in this term of government, she wants to see an investment allowance to encourage investment.
“We’re in a situation where we are staring down a long period of low growth and that long period of low growth means lower wages and that’s very very difficult for Australian households,” Ms Westacott said.
All eyes will be on retail spending figures on Friday for a sign of whether past interest rate cuts and personal income tax cuts are having an impact.
Economists forecast retail trade grew by 0.5 per cent in August after the disappointing 0.1 per cent fall in July despite two rate cuts and the introduction of tax cuts.
AAP
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