Time for the rate that stops a nation

Financial analysts say a Melbourne Cup Day rate cut is not a sure bet, writes Anthony Keane

THE Reserve Bank of Australia’s interest rate cuts are nearly over – simply because they’re almost as low as they can go.

Three rate cuts since June have pushed the RBA’s official cash rate to 0.75 per cent, and economists say only one or two more cuts are possible before they would cause wider financial market problems.

A Melbourne Cup Day rate cut is a slim chance, with financial markets suggesting it’s more likely to be in December or February.

AMP Capital chief economist Shane Oliver said he had one more 0.25 percentage point rate cut pencilled in this year and another early next year. “I think they probably should go in November to get it out of the way,” he said.

The RBA uses interest rates as a lever to try to keep inflation at a healthy 2-3 per cent. The theory is it lowers inflation by raising its official cash rate, or lifts inflation by cutting.

However, that’s stopped working. Last week’s inflation figure was 1.7 per cent and the RBA is running out of rate cuts.

“A whole lot of people are saying interest rates aren’t helping and the Reserve Bank has reached the bottom of the barrel,” Dr Oliver said.

“The Reserve Bank is on record saying the lowest feasible level would be around 0.25 to

0.5 per cent.”

After that it could consider unconventional monetary policy, including printing money and lending banks cash at very low rates, provided it was then lent out.

“A lot of people are saying monetary policy has now run its course and you would be better handing the baton over to the Federal Government to provide stimulus,” Dr Oliver said.

This could be through infrastructure spending, tax cuts or Newstart Allowance increases that were almost certain to be spent.

But the Government wants to deliver a Budget surplus and keep a kitty for future financial emergencies.

CommSec chief economist Craig James said he expected the RBA to wait until early next year before deciding if more rate cuts were required.

“The rate cuts have actually been having the opposite to the desired effect – spooking Aussie consumers,” he said.

BetaShares chief economist David Bassanese said he believed the RBA had “one more rate cut up their sleeve” but would wait until 2020. “They’re very reluctant to go below 0.5 per cent – I think that’s really as far as they can go,” he said. “Any lower can complicate the operation of financial markets, and it’s increasingly harder for banks to be able to pass it on anyway.” Pushing interest rates back up again will be tough as it will blow out mortgage repayments for already-stressed households and potentially hurt the economy.

“The more reliant people are on low rates and the lower they go, the harder it is to get them back up later,” Mr Bassanese said. And there is no room to move in a future crisis.

When the GFC struck in 2008, the RBA slashed the cash rate from 7.25 per cent to 3 per cent in just seven months.

“We have lost that safety net,” Mr Bassanese said. “It’s a very interesting historic period that we are living through.”

Dr Oliver said banks were “passing less and less on” to borrowers.

“Banks don’t borrow from the Reserve Bank – they borrow from depositors and the money markets,” he said.

“Some deposit interest rates are already flat and they don’t want to make them negative.”