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Cash rate hits new low

The central bank has taken markets by surprise, cutting the official cash rate for the third time in four months.

The Reserve Bank of Australia (RBA) has lowered the official cash rate to a new record low of 0.75 per cent.  

Analysts were expecting the RBA to hold off on further cuts until the end of the year, as it monitors the impact of its back-to-back reductions in June and July.  

Managing director of mortgage aggregator Finsure John Kolenda had said that global instability, which has been heightened by US-China trade tensions, would not have been enough to prompt the RBA to lower the cash rate in September.  

“As yet, we haven’t seen any negative economic impacts hit the economy, and we should be cautious in reducing rates too much and too quickly because it could possibly dislocate the economy in other ways as evidenced by what has happened to the economy in Japan and Europe,” Mr Kolenda said.

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“Consumers should feel comfortable that the RBA, the regulators and the federal government have plenty of options up their sleeve to help the domestic economy navigate its way through any possible challenges.”

Mr Kolenda added that while he expected the central bank to cut rates further, the stimulatory effect of such reductions would be “minimal”.

“It is difficult to see consumers gaining confidence in spending when the global economic news is so negative,” he said.

“But positive consumer sentiment is what’s required to invigorate the economy. As the federal Treasurer Josh Frydenberg intimated, we also need to see a rise in business confidence and investment to stimulate the economy to help cushion any global headwinds.

“We are likely to see another rate cut over the coming quarter but also hopefully some positive economic news, which will help elevate confidence and consumer spending to enable us to ride out the storm.”

Reflecting on the RBA’s decision, CoreLogic’s research director, Tim Lawless, said that the recent pick-up in housing market conditions was not enough to dissuade the central bank from lowering rates in September.

Mr Lawless said that the RBA’s cuts in June and July, as well as the Australian Prudential Regulation Authority’s (APRA) changes to its lending guidance, had already contributed to a notable spike in market conditions, evidenced by the rise in national home values in August – the first increase since April 2017.     

“Clearly housing market conditions are responding to lower interest rates as well as the recent loosening of loan serviceability rules from APRA and the positive influence of the stable federal election outcome,” he said.

Mr Lawless added that the recent improvement in housing market confidence could trigger a sharper than expected recovery, which may prompt policymakers to introduce a fresh wave of credit curbs to limit the build-up of debt.

However, despite risks associated with a “V-shaped” housing recovery, the RBA was expected to follow through with an easing strategy designed to strengthen labour market conditions.

AMP Capital chief economist Shane Oliver is expecting one additional cut by the end of the year, which would take the cash rate to 0.5 per cent.

[Related: Negative interest rates ‘only a matter of time’]

Cash rate hits new low
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