Interest rates have been cut by the Reserve Bank of Australia (RBA) for the third time this year, falling 25bps from 1% to 0.75%, and the RBA said a period of low rates was to be expected going forward.
They were previously cut in June and July, each a reduction of 25bps, and there had been speculation since then over whether a third rate cut would come this year or in 2020.
RBA governor Philip Lowe said the decision had been taken in order to support employment and income growth.
In a statement following the RBA meeting, Lowe said: “The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target. The economy still has spare capacity and lower interest rates will help make inroads into that.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
The bank also noted there had been a ‘turnaround’ in the housing market, particularly in Sydney and Melbourne.
Anthony Doyle, cross-asset investment specialist at Fidelity, said: “Going forward, the substantial easing in monetary policy should boost the Australian economy’s growth prospects. Lower interest rates and tax cuts will likely support domestic consumption, while a rebounding housing market (if sustained) will support housing construction.
“However, the RBA remains concerned about the prospects for global growth, with Governor Lowe recently commenting that global downside risks had caused ‘a marked shift in the outlook for monetary policy globally’. Given the global economic backdrop, and a low inflation outlook, the RBA is likely to continue to retain its easing bias.”
Jacob Mitchell, chief investment officer at Antipodes Partners, said: “This is not unique to Australia, with rates globally trending lower against a backdrop of slowing economic activity. We’re seeing more and more evidence of central bank impotence, and the drumbeats around fiscal stimulus are getting louder.
“Fiscal stimulus is ultimately inflationary and investors should consider what this means for bonds and bond-like equities, which have now grown to account for almost 50% of the global market cap.”
However, super investors, particularly those who were younger, were classed as ‘losers’ from the change as the interest rate cut would be a negative for those trying to save.
Superannuation provider Spaceship chief executive, Andrew Moore, said: “These forgotten Australians are the 55% of 25-34 year olds who don’t own property, and either live at home with family or are renting. They are typically savers rather than borrowers, and interest rate cuts lower the returns they receive on their bank savings.
“Lower interest rates favour borrowers but hit savers hard. Savers might want to consider adding higher risk/higher return investment products to the mix in this low interest rate environment.”
