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RBA gifts borrowers pre-Christmas rate cut

The central bank has surprised industry pundits, announcing a further cut to the official cash rate. 

The Reserve Bank of Australia (RBA) has lowered the official cash rate to 0.5 per cent, defying market expectations.  

Analysts were expecting the RBA to save its ammunition, as it monitors the extent to which its reductions in JuneJuly and October have supported its objectives of sustainable growth in the economy, full employment, and 2-3 per cent inflation.

Despite predicting a hold verdict, chief economist at AMP Capital Shane Oliver noted the benefits of a cut ahead of the Christmas break.     

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“Given the recent run of weak data on jobs, retail sales, car sales, housing construction, business investment and credit, the RBA’s own forecasts for barely any progress towards reaching its goals over the next two years, and that the RBA sees rate cuts as still working, it should be cutting rates [again] — particularly [given] that the next board meeting is not till February,” he said ahead of the announcement.

However, drawing from remarks by RBA governor Philip Lowe, Mr Oliver said they suggested “little urgency” and a preference to “wait and assess” given the “long and variable lags” of monetary policy.

Nonetheless, the economist added that he was expecting back-to-back cuts in February and March, which would take the cash rate to 0.25 per cent.

According to Mr Oliver, the RBA would then consider quantitative easing (QE) in the absence of fiscal policy stimulus in the federal government’s budget in May.

Managing director of mortgage aggregator Finsure John Kolenda had also predicted a hold verdict, adding that while a reversal in domestic economic conditions was unlikely, additional cuts to the cash rate may have “unintended consequences” and further dampen sentiment.

“In some ways, we should feel comfortable as we haven’t seen rates this low in history and watching them get lower might produce unintended economic consequences that might be less preferable to the ones we face today,” he said.

However, Mr Kolenda said the low rate environment would support consumer spending over the Christmas period.  

“The RBA’s rate reductions have been helping to provide consumer confidence with a boost, and they can be comfortable about the fact interest rates are staying low for the foreseeable future,” Mr Kolenda said.

[Related: Unconventional tools out of the question, for now: RBA]

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