Central Banks

Australia's central bank cuts interest rates again — more easing may be on the way

Key Points
  • The Reserve Bank of Australia cut its benchmark cash rate by 25 basis points to a historic low of 1%.
  • The central bank said it will ease again "if needed" to support growth.
  • Markets have priced in rates of 0.75% by Christmas.
The Reserve Bank of Australia headquarters in the central business district of Sydney, Australia.
Lisa Maree Williams | Bloomberg | Getty Images

Australia's central bank on Tuesday cut interest rates for the second time in as many months as it strives to revive a sluggish economy and reduce unemployment, a tough task that may yet require even more stimulus.

The Reserve Bank of Australia's (RBA) quarter-point cut took cash rates to an all-time low of just 1% and left limited room for more reductions, raising the possibility of unconventional policy easing.

It also piled pressure on the newly re-elected Liberal National government to respond with fiscal stimulus of its own, something the central bank has been crying out for.

"This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target," said RBA Governor Philip Lowe following the bank's monthly board meeting.

He also issued a conditional easing bias, saying the bank would watch the labor market closely and would adjust policy "if needed" to support growth.

Lowe is due to give a speech later in the day in which he will likely expand on the reasoning for the move and the prospect of yet further action.

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Markets are well ahead of the governor, pricing in rates of 0.75% by Christmas. With so much easing already in the price, the was left to idle at $0.6980.

The RBA is hardly alone in easing with markets convinced the U.S. Federal Reserve will have to cut at the end of this month, likely followed by the European Central Bank and Bank of Japan.

Lowe has also broken with tradition recently to openly call for more government spending on infrastructure as urgent support to an economy running at its slowest pace in a decade.

So far, the conservative government of Prime Minister Scott Morrison has played down the need for stimulus, instead reaffirming a political commitment to budget surpluses.

More to do

While some long-touted tax rebates are due in the next month or so a slew of much larger tax cuts are not planned until 2024, far too distant to have any impact on consumer spending now.

A pick-me-up is badly needed as years of sub-par wage growth has pinched household incomes, while a long downturn in home prices have eaten into consumer wealth.

There has been a glimmer of light in the past month as the June cut in rates and a proposed relaxation of mortgage lending rules injected some much needed life into the housing market.

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Clearance rates at auctions have rebounded and prices steadied as buyers returned. Data from property consultant CoreLogic out on Monday showed Sydney home values had risen in June for the first time in almost two years.

Any stabilization would be a tonic for spending power and confidence given Australia's housing stock is valued at A$6.6 trillion ($4.60 trillion), or almost four times the country's annual gross domestic product.

Much more will be needed, however, for the RBA to meet its target of pushing unemployment down to around 4.5% - a low not reached since 2008 - from the current 5.2%.

"Domestic data have been weaker than the RBA expected and the unemployment rate looks set to be higher than it assumed," said David Plank, head of Australian economics at ANZ.

"So it's hard to see how the Bank can conclude that anything other than further easing is required."