Australia Central Bank Leaves Cash Rate Unchanged

Australia Runs Into ‘Reversal Rate’ as Cuts Unsettle Consumers

Australia Runs Into ‘Reversal Rate’ as Cuts Unsettle Consumers

The official cash rate sits at a record low of 0.75 per cent after the RBA cut rates by 0.25 percentage points in October.

The risk for the RBA is that low interest rates do little to support growth outside of inflating house prices, which are rising again in major cities after a two-year slowdown.

NAB's economists still expect a December rate cut "predicated in part on the economy remaining generally softer than expected", but suggest a pause next month might mean the RBA is preparing unconventional policy measures for early 2020.

But while Tuesday's decision was to hold the cash rate - a key component in banks' interest rates for businesses and consumers - Governor Philip Lowe was clear there was still room for future cuts as central banks worldwide ease in response to low inflation.

"Irrespective of what the Reserve Bank does, rate cuts remain available to borrowers with interest rates as low as 2.69 per cent". Prices in Melbourne rose 2.3% in October, the biggest monthly gain in nearly 10 years, and have climbed 6% since May.

The decision came off the back of a 25 basis point cut at last month's meeting, after another two cuts in June and July.

Detailed forecasts for the next couple of years will be released in the RBA's quarterly statement on monetary policy due on Friday.

"The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending", Dr Lowe said.

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In a new addition, Lowe added that, "other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle".

"At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low".

The AFR reported that Frydenberg had been considering for several months whether to "harden" the RBA's accountability for hitting its 2-3% target.

Offshore, key trading partner China continues to slow and instability from Brexit to Hong Kong is weighing on global growth.

The currency is holding below 70 US cents, and policy makers will want to keep the pressure on the Aussie to aid growth, particularly as the government is disinclined to add stimulus to the economy.

The Aussie has risen about 1.5 per cent against the U.S. dollar over the past 10 days, but another rate cut should reverse at least some of that gain.

-With assistance from Tomoko Sato.

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