The consecutive cuts made by the Reserve Bank of Australia (RBA) in June and July have resulted in Australia’s official cash rate (OCR) to be at a historic low of 1.0 per cent. Commercial banks borrow money from each other to manage their daily cash needs. The OCR is the interest banks pay on the money they borrow, and it serves as the benchmark interest rate for the country.
The RBA held off making further cuts in August and have continued to hold the official interest rate in September at 1.0 per cent. Additional cuts to the cash rate seem likely for the RBA to accomplish their goals.
While GDP remains positive, this is mainly due to the public sector. The growth rate of the economy is slow as private demand continues to fall. Low growth in wages plays a key role in private demand falling. Wage growth in Australia for the past five years has been under 2.5 per cent. The RBA was optimistic that the recent tax and interest cuts would incentivise consumer spending and help boost the economy.
This does not seem to be the case; the Australian Bureau of Statistics reported that in July, retail sales fell by 0.1 per cent. This was somewhat unexpected since the tax offset payments came through at the beginning of July with the tax returns.
The Melbourne Institute and Westpac Bank Consumer Sentiment Index for Australia reported that consumer confidence dropped by 1.7 per cent in September to 98.2 per cent. This is indicative of pessimistic consumers outnumbering optimists. This shows that more consumers are pessimistic about the outlook of Australia’s economy. Which results in consumers spending less because they are more worried about financial prospects and job security.
Westpac and Melbourne institute conducted a monthly questionnaire asking consumers what they plan to do with the tax offset payments. A quarter of the consumers surveyed responded that they plan to save the full amount while more than half said they plan to spend less than half of their tax offset.
In a recent statement, RBA governor Philip Lowe said, “It is reasonable to expect that an extended period of low-interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target.”
The RBA has expressed that if the current measures taken fail to generate reasonable activity, it is prepared to lower rates further. Although it is unlikely, the RBA will consider unconventional monetary policy to stimulate the economy. This includes pushing the OCR to zero or negative. It also includes quantitative easing, which is when the RBA purchases government and private securities to increase the money supply to encourage lending and investment. The National Australia Bank has stated that if the federal government does not start its own program to stimulate the economy, rates will approach zero and the RBA will be forced to resort to unconventional methods.
It seems that low-interest rates will persist for some time. This is not welcomed by those who want to save money on interest-bearing accounts, particularly pensioners who rely on their cash savings will suffer the most losses if low rates continue.
People who are looking to go overseas for a holiday might want to reconsider as cuts to the interest rate push the Australian dollar further down. Despite this being an unfortunate reality for overseas travellers, it is in the RBA’s interest because if the money is spent within Australia it could contribute to growth in the economy.
The biggest winners due to low-interest rates are mortgage holders. Lower interest rates reduce the borrowing costs for consumers and businesses.
If a turnaround does not happen soon and consumer spending does not substantially rise, we can expect the RBA to make further cuts and push us closer to a zero cash rate.