Monday, August 5, 2013

RBA cuts rates by 25bp to 2.5pc as Rudd, Abbott battle over economy - The Australian

THE Reserve Bank of Australia cut interest rates to an all-time low today, fuelling a pre-election slanging match between the major parties about the health of the Australian economy.

As it emerged yesterday that retail sales growth had slumped to half-century lows, the central bank trimmed the official cash rate today by 25 basis points to 2.5 per cent, its eight interest rate cut since late 2011, to try to kick start lacklustre business investment and confidence in the non-mining sectors.

Australia's big four banks will face immediate pressure to cut their mortgage interest rates by the same amount, which would drag discounted home loan rates to an average of 5.10 per cent, their equal lowest level since the 1990s recession.

The widely expected rate cut became a political football yesterday when Shadow Treasurer Joe Hockey suggested that excessively low interest rates were a sign of economic weakness rather than a good economic management. Prime Minister Kevin Rudd and Finance Minister Penny Wong shot back, arguing that Mr Hockey wanted Australians to pay higher interest rates.

The level of interest rates in Australia, to which indebted households living in marginal electorates are typically sensitive, have been a source of political tension since former prime minister John Howard said that rates would always be lower under a Coalition government.

Expectations of further interest rate cuts had been building since late July, sapping the Australian dollar which fell briefly below US89 cents this week, its lowest level in almost three years.

RBA Governor Glenn Stevens gave a sombre economic speech last week suggesting that non-mining investment was picking up too slowly, while it emerged Australia's inflation rate over the year to June was 2.4 per cent, well within the Reserve Bank's target range, giving the bank scope to cut rates further.

Treasurer Chris Bowen also released a set of new, less optimistic economic projections last week showing that unemployment would peak near 6.5 per cent next year and economic growth would dwindle to 2.5 per cent this financial year, culminating in an embarrassing $33 billion of revenue writedowns that blasted a hole in the government's budget.

Credit growth, home loan approvals (especially among first home buyers) and new building approvals also remain weak despite repeated attempts to boost activity with lower interest rates.

Financial markets are pricing in another cut in rate over the next year.
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