The Reserve Bank of Australia (RBA) has cut the interest rate to the new record low of 1.25%. This marks the first time that the RBA has used its central monetary policy lever in nearly three years of time; this is the longest period of interest rate stability in Australian history. This official rate cut comes just weeks after the Australian federal election held earlier in May this year. The last time the central bank changed interest rates was back in August 2016, a month after Malcolm Turnbull won the 2016 federal election.

The RBA’s decision came 3 hours after the Australian Bureau of Statistics released slowing retail data off the back of reducing house prices and low wage growth. Across the retail sector, sales fell 0.1 percent Australia-wide, with NSW and Victoria leading the falls at 0.4 per cent. This suggests that the sector will be facing growing challenges from online sales competition paired with poor income growth.

This rate cut was made in order to stimulate a slowing economy and in an effort to turn around sluggish employment, wages and inflation. ANZ was the first of the big four banks to react, announcing it would trim mortgage rates by 0.18 percentage points within 10 minutes of the RBA's decision. The Commonwealth Bank, National Australia Bank and Westpac are yet to announce their respective decisions.

In his statement on Tuesday, Dr Lowe said despite strong employment growth over the past year, "there has been little further inroads into the spare capacity in the labour market of late" and "overall wages growth remains low."

"Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment."

"The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased." Dr Lowe said the Australian economy was poised to grow by around 2¾ per cent in 2019 and 2020.

“The board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”

However, many Australian economists predict this is just the first of several cuts headed our way, with a second 25 basis point reduction believed to be on the cards as soon as August this year.

For the official RBA article, please visit the Reserve Bank’s website.

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