RBA drops cash rate to record low

The RBA has surprised the industry after announcing a cut to the official cash rate, bringing the interest rate down from 1.50 per cent to a record low of 1.25 per cent.

The last time the cash rate moved was in August 2016, when it ticked down. The RBA last introduced an increase over seven years ago (November 2010), when the rate climbed to 4.75 per cent.

Prior to the announcement, none of the surveyed respondents on the finder.com.au panel predicted a rate cut, with the overwhelming majority (97 per cent) predicting the cash rate to remain unchanged.

Further, of the 32 surveyed panellists, 83 per cent said that they expected the next rate announcement to be an increase.

While many industry players expected the rate to hold at 1.50 per cent, several did suggest that it would be unlikely that the RBA would increase rates any time soon.

Economist at Corinna Economic Advisory Saul Eslake expected the RBA to hold the cash rate, noting that economic conditions had not “materially changed” following the RBA’s previous rate determination.  

“Nothing has materially changed since the RBA last stated that current monetary policy settings were (in its opinion) appropriate,” Mr Eslake said.

“There’s been no new data on price or wage inflation, and the most recent labour force data suggests that the margin of spare capacity in the labour market remains unchanged, despite ongoing strong employment growth (because most of the new jobs are going to new entrants to the labour force).

“[The] RBA has repeatedly made it clear that it feels under no pressure to follow other central banks in hiking rates.”

Managing director of Market Economics Stephen Koukoulas also predicted a hold verdict but urged the RBA to drop the cash rate.

“The RBA is unable to get away from its obsession with non-existent financial instability. It should be cutting rates,” Mr Koukoulas said.

Associate professor at Monash University Mark Crosby was the only panellist to predict a rate move, claiming that the case for a rate rise was “very strong”.

However, the managing director of 1300 Home Loan, John Kolenda, said he believes that global market conditions could prompt lenders to increase rates, regardless of the RBA’s decision.

“[T]here are some lenders facing increases in the cost of their wholesale funding which they blame on the impact of US economic policies,” Mr Kolenda said.

“They have already lifted rates for business loans and have warned they may have to also pass on these increases to home loans.”