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RBA cuts interest rates to 2.75%: the experts respond

The Reserve Bank of Australia today cut the cash rate by 25 basis points to a record low of 2.75%, but some experts have…

Reserve Bank governor Glenn Stevens said today that the bank’s board judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy. AAP/Alan Porritt

The Reserve Bank of Australia today cut the cash rate by 25 basis points to a record low of 2.75%, but some experts have questioned whether the central bank cut too soon.

In a statement issued today, central bank Governor Glenn Stevens said that the RBA board “has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand.”

“It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target,” the statement said.

The new cash rate is the lowest Australia has had since record keeping began, a spokeswoman for the RBA said.

Today’s cut follows last month’s announcement that inflation was tracking within the RBA’s target range.

Federal Treasurer, Wayne Swan, welcomed today’s decision.

“It does show interest rates are now even lower under Labor. I think this is an interest rate cut that is going to be welcomed by families and small businesses and I certainly think it’s an interest rate cut they thoroughly deserve,” he said.

Here are some expert responses to the RBA decision:

Mark Crosby, Associate Professor of Economics at Melbourne Business School

It’s not surprising.

It could have gone either way but inflation is low so there’s no reason not to cut. The good news out of that is further weakness in the currency.

It will weaken the Aussie dollar a little bit. It already went down a little in the expectation it might.

The problem with interest rates being as low as they are is it will further elevate house prices and share prices.

On the other hand, manufacturers and some other industries are really feeling it so this will really help them on the Aussie dollar front and on the interest rate front.

Mardi Dungey, Professor and Deputy Head, School of Economics and Finance at University of Tasmania

I don’t think it’s a big surprise. The question is whether it’s the right timing or whether we are going too early.

Frankly, inflation is not high. Although there are signs of weakness, particularly in the regions, we are not in recession.

The problem is: where do you go once rates get too low, which is the problem they now have in the UK and in Japan.

I am very pleased to see we have eased off on this surplus nonsense. We should be talking more about what is our plan for redistributing wealth among the different regions and asking ourselves do we have problem with Dutch disease.

Shaun Vahey, Professor, ANU College of Business and Economics at Australian National University

I am not that surprised. Some of the recent data has been a little weaker than expected but whether they should have moved this month or later is the question.

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6 Comments sorted by

  1. Henry Verberne

    Former IT Professional

    To me the real issue is not just interest rates but our high currency which has caused a lot of weakness in the non-mining sectors of the economy.

    Surely this country needs to "manage" it's currency to improve competitiveness.

    Could a "dirty float" managed by the RBA be worth considering?

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    1. mark western

      turnaround consultant

      In reply to Henry Verberne

      Of course it's worth considering. Business simply cannot improve their productivity at the rate of currency appreciation with the enormous pools of global cash looking for attractive returns.
      Brazil imposed a 2% tax on foreign purchases of equities and bonds which simply acts to reduce the return to foreign purchasers of equities and bonds closer to global trends. Exporters are not hurt neither is domestic repatriation of foreign profits.
      This is a far cry from the days of the gold standard…

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  2. John C Smith

    Auditor

    Poor old people who have saved some for the old age, they might be asked to pay more fees to the four pillars for holding their money.

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  3. robert roeder
    robert roeder is a Friend of The Conversation.

    retired

    This rate cut will provide a little stimulus and weaken the dollar a bit. The concerning thing is that it takes us a little closer to that zero interest point. The US and Japan have been there for awhile now, no wriggle room left. They both are borrowing central bank money to pump a little, this has not been working all that well. As the debt grows more money is needed to cover the increasing interest due.
    We are incredibly lucky in this country, we have this enormous resource wealth and a relatively small population, imagine if our population was 100 million instead our 23 million.
    Lets hope that the budget next week and the opposition's reply contain something approaching a sensible strategy to continue our sweet position and avoid the outside turmoil.

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  4. John Kelmar

    Small Business Consultant

    Again we see the Reserve Bank and the Government manipulating the share market and exchange rates under the guise of helping the nation. In a free market economy, the players act according to supply and demand, and does not need outside manipulation for it to be successful.

    Australian manufacturers want a lower dollar exchange rate so they will be more competitive internationally, but if they increased their quality, then selling at a high price is not a problem. In the 1950's the Australian pound was strong and our produce was in great demand throughout the world because we produced quality.

    It's akin to Governments increasing the salaries of politicians and public servants in order to attract better people, but as we can see the result is the opposite.

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  5. Terry Reynolds

    Financial and political strategist

    The Official rate would not be at 2.75% but at 3.5% if the big four banks had moved interest rates in line with official movements by the RBA which is their social contract. They chose under Sir Ralph Norris of the CBA in early 2008 to start thumbing their collective noses at the RBA and the public, gouging with immunity. They did not see the GFC coming yet they are deeply involved in the world markets. The reason we got off the hook was because margins on housing loans here were much higher than…

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