The Reserve Bank of Australia has cut rates to a record low 0.75 per cent following persistent weakness in the labour market.
RBA governor Philip Lowe has repeatedly flagged concerns over excess slack in Australia’s labour force, which has worsened in recent months despite employment generally ticking upwards.
Growing numbers of women and older Australians looking to join the labour force meant unemployment rose to 5.3 per cent in August, even though 34,700 new jobs were added to the economy.
The Reserve Bank hopes cutting interest rates will bring down unemployment and lift inflation.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” Dr Lowe said.
“The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time,” he added.
But BIS Oxford Economics chief economist Sarah Hunter said the effectiveness of the cut could be hamstrung by the banks. Dr Hunter said banks had already been struggling to match RBA cuts, and will be increasingly unlikely to pass on reductions to borrowers the closer the official cash rate gets to zero.
Banks passing on these cuts is pretty crucial to the actual impact they have on the economy. So if we don’t see the banks matching it, or they limit how much they pass on to their customers through their mortgage borrowing rates, then that will certainly limit the effectiveness of the cut in stimulating the economy.
Banks are likely to pass on some of the cut, but likely to pass on the full 25 basis point cut.
Savers, on the other hand, will be squeezed by the cut, and may need to “jump through some hoops” to qualify for higher interest rates on savings accounts and term deposits.