The Reserve Bank is widely tipped to take the cash rate below 1.0 per cent this week to enhance the effect of recent stimulus that appears to have done little else apart from fuel a property price surge.
The market has priced in a strong chance of a 0.25 percentage point reduction to a new record low interest rate of 0.75 per cent on Tuesday, with economists from each of the big four banks expecting the RBA board to cut for the third time this year to try shake the nation out of economic stagnation.
But the jury is out on whether a cut will deliver the desired lift in household consumption, with experts suggesting deeper structural reforms or more government-led stimulus will be needed to kick-start economic growth that has slowed to its weakest pace since the GFC.
“Although fiscal support for growth would be better, as we noted again recently, there has been little appetite for it given the government’s imperative to deliver budget surpluses,” HSBC’s chief economist for Australia and New Zealand Paul Bloxham said in a note.
The RBA held the cash rate at a record low 1.0 per cent in both August and September as it gauged the effect of the cuts in June and July, as well as the impact of government’s tax offsets for low to middle income earners.
But there are few signs so far this has had an impact anywhere but the housing market, where prices and auction clearances have improved in the major Sydney and Melbourne markets after a two-year downturn.
The adoption of looser lending rules have also helped the housing recovery, a development championed by the likes of Treasurer Josh Frydenberg, but something that has left some concerned over the potential re-emergence of risks to borrowers.
“While higher turnover is likely required to deliver positive effects on consumption, another month or two of strong growth in loan approvals and dwelling prices would likely make officials nervous about the re-emergence of risks relating to household leverage”, JP Morgan economist Sally Auld said this month.
A 0.25 per cent cut on Tuesday, if passed on in full, would equate to additional savings of about $70 per month on a 25-year standard variable loan of $500,000.
Anticipated savings for mortgage holders – together with the government’s tax offsets – were supposedly initiated to encourage spending, and in turn encourage businesses to expand and hire, reducing jobs market slack, and create the competition necessary to put upwards pressure on wages and inflation.
Instead, unemployment and underemployment have continued to climb, with the jobless rate hitting 5.3 per cent in August, a long way from Governor Philip Lowe’s long-term jobless goal of 4.5 per cent.
Retail spending has also disappointed, falling by an unexpected 0.1 per cent in July despite the measures taken by the RBA and government so far.
Economists, however, expect a 0.5 per cent lift in August retail trade when official ABS figures are released on Friday.
It also remains to be seen whether the banks will pass on any cut in full, particularly as their margins shrink and they are required to have more cash in reserve.
NAB, ANZ, Westpac and Commonwealth Bank passed on between 0.40 per cent and 0.44 per cent of the 0.50 per cent aggregate cuts in June and July.