Interest rates were cut to a record low of 0.75% by the Reserve Bank of Australia (RBA) on the 1st of October 2019. This decision was made on the back of global uncertainties surrounding the trade war between the US and China, as well as the current and future outlook of the Australian economy.
The disputes between the US and China over trade and technology is having a large effect on the world economy. A lot of companies are sitting on the fence to see the aftermath of the turmoil before they proceed with business investments, and this is causing a drag on the economy. Interest rates and inflation around the world also remain low, with the US decreasing their cash rate from 2% to 1.8%, and their inflation rate measuring approximately 1.7% in September 2019. These factors are having a negative effect on economic growth, both globally and within Australia due to us being a high spending consumer economy.
The RBA believes that a longer period of low interest rates is required to decrease unemployment and increase both wage growth and the inflation rate. Inflation remains low in Australia at around 1.6%, below the RBA’s goal of 2-3%. This inflationary goal represents a sustainable level of economic growth for Australia. The most recent interest rate cut is an attempt to stimulate growth and inflation in the economy.
The unemployment rate remains steady at 5.25% and the RBA also noted that the established housing market in Australia is starting to display a turnaround, while new dwelling activity is weakening. Borrowing conditions for individuals and businesses within Australia remain tight due to tightened regulations and restrictions imposed on lenders. Overall, the RBA expects the Australian economy to display steady growth over the next 12 months due to “the low level of interest rates, the recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets, and a brighter outlook for the resources sector.”
Generally speaking, the RBA’s recent interest rate cut isn’t all bad for the long run. While we may see some volatility in the short term in the markets, it’s important to remember that this volatility is smoothed out in the long run.