RBA drops cash rate to new low

The RBA has left the industry dumbfounded after announcing a cut of 25 basis points to the official cash rate, bringing the official rate to a new record low of 1.25 per cent.

The last time the cash rate moved was in August 2016, when it ticked down to 1.5 per cent.

The RBA last raised the cash rate over seven years ago (November 2010), when it climbed to 4.75 per cent.

Prior to the announcement, none of the surveyed experts on the finder.com.au panel predicted a rate change, with 81 per cent of panellists expecting the next cash rate movement to be up. 

However, despite predicting a hold decision, managing director of Market Economics Stephen Koukoulas said that it made sense for the RBA to cut rates. 

"[The] RBA continue[s] to miss its inflation target, and despite evidence that a rate cut is needed, it is likely to remain on hold. It will cite an improving global economy as a key reason,” Mr Koukoulas said.

“For more than two years now, inflation’s been below the bottom of their target range, so I think they need to ensure monetary policy is set towards reflating the economy, getting inflation a little bit higher.

“You then throw in a few issues like the softness in housing, which has been something of a concern.

“If the house prices in Sydney and Melbourne keep falling, there’s a potential risk to the economy there.”

‘Much-needed cheer to home owners’

Other commentators also noted “some weaknesses” in the economic indicators but still expected rates to remain at 1.5 per cent.

The head of investment strategy and chief economist at AMP Capital, Shane Oliver, said: “While confidence, jobs and non-mining investment are strong, inflation remains below target, wages growth remains around a record low, uncertainty is high regarding the outlook for consumer spending and the Australian dollar is too strong. As such, it is too early for the RBA to consider raising interest rates.”

The CEO of Mortgage Choice, John Flavell, said that he was surprised by the RBA’s decision, claiming that the central bank had “made it clear” that a rate cut was not on the cards.

The CEO said: “While today’s decision will no doubt deliver some much-needed cheer to home owners, the timing of the rate cut can at best be described as ‘interesting’.

“Over the last year, the Reserve Bank has made it clear that future rate cuts were unlikely.”

CoreLogic head of research Tim Lawless made reference to slowed activity in the housing market in his hold prediction, citing a 0.7 per cent fall in dwelling values.

“With headline inflation remaining below the RBA’s target range of 2–3 per cent, housing markets moving through a controlled slow down, a higher than forecast Australian dollar and household debt at record highs, the hold decision from the Reserve Bank was widely expected,” Mr Lawless said.  

Meanwhile, amid a historic 6 per cent plunge in the Dow Jones on the US Stock Exchange, professor at Monash University Mark Crosby claimed that the RBA board would be influenced by movements in foreign markets, but he expected the next rate movement from the RBA to be an increase. 

Mr Crosby said: “2018 will be watch and wait for the RBA, as they observe movements in overseas rates and ponder timing for a rate rise in Australia.”

[Related: RBA rate cut would be a good move, says economist]