RBA Drops Interest Rates Again To Even Lower Historic Low

The official cash rate has been slashed below one percent, as the Reserve Bank again cut interest rates to unprecedented lows.

On Tuesday afternoon, the RBA announced the official cash rate would be dropped to 0.75 percent -- the first time it has ever dropped below one percent.

In a statement, the RBA said "while the outlook for the global economy remains reasonable, the risks are tilted to the downside", citing "a weaker-than-expected" expansion to the national economy of just 1.4 percent over the year to the June quarter.

After interest rates were dropped twice in a row, by 0.25 percent each in June and July, rates have remained at the historic one percent for two consecutive months. But in decreasing the official rate again, the RBA has signalled the national economy needs further stimulation.

Indeed, the RBA flagged that even further cuts to the cash rate could come in future, "if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time."

Prior to June, the cash rate had stayed steady at 1.5 percent since August 2016.

"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 RBA said on Tuesday.

"The economy still has spare capacity and lower interest rates will help make inroads into that."

Prime Minister Scott Morrison and Treasurer Josh Frydenberg at the Reserve Bank of Australia in Sydney. Image: AAP

RBA governor Philip Lowe said last month that "economic growth in Australia over the first half of this year has been lower than earlier expected."

"It is reasonable to expect that an extended period of low-interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target," he said.

The governor added further easing of interest rates was on the cards "to support sustainable growth in the economy and the achievement of the inflation target."

In the minutes of its September meeting, the RBA had noted that internationally, "a number of central banks had reduced interest rates over recent months and further monetary easing was widely expected."

The Reserve Bank also spoke of "historically low" borrowing rates for businesses and households, and a low exchange rate for the Australian dollar. Further dropping the official cash rate is seen as encouragement for people and firms to borrow money, with the 'cost' of borrowing now lower.

RBA Governor Philip Lowe meets with Treasurer Josh Frydenberg in July. Image: AAP

The big banks will come under immediate pressure to pass on the rate cut to customers, an action which would lower mortgage and loan repayments but also lead to lower returns for those with money in savings accounts.

In the June and July cuts, the 'big four' banks -- Westpac, Commonwealth, NAB and ANZ -- were criticised for not passing on the rate cut in full.

While the RBA slashed rates by 0.5 percent in total, Commonwealth and NAB only lowered theirs by 0.44 percent; ANZ by 0.43; and Westpac only by 0.4.

Banks including the Commonwealth will be pressured to pass on the rate cut. Image: AAP

Tim Lawless, head of research at property analysts CoreLogic, said housing prices in Sydney and Melbourne bouncing back from recent dips weren't enough to keep the RBA's confidence in the economy.

"A trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA’s decision to cut rates to a new low, as well as concerns around persistently weak household spending, subdued wages growth and low inflation," he said in a statement.

"The rebound in housing conditions should help to support an improvement in economic conditions as higher housing prices translate to a wealthier and more confident household sector who will hopefully be inclined to spend more."

"There is a risk that lower interest rates could fuel a further rise in household indebtedness as housing credit picks up and investors once again become more active, while higher housing prices are likely to curb participation from first home buyers despite the lower cost of debt."

More to come.