Australian interest rates have been cut to their lowest level in history.
The official rate is now just 1.25 per cent after the Reserve Bank board met today and agreed to lower the rate from 1.5 per cent.
It has been forced to cut rates in a bid to prevent the unemployment rate rising in an environment where economic fundamentals are already incredibly weak.
Treasurer Josh Frydenberg has called on the major banks to pass on the full rate cut to their customers, reminding them of the criticism they received during the banking royal commission for putting profits before people.
ANZ says it will only pass on 18 of the 25 basis-point cut, which has drawn criticism from the Mr Frydenberg.
“This is deeply disappointing from ANZ,” he said.
“Actions like this don’t give the Australian people any comfort that the banks have changed their behaviour.
“The impact of a 25 basis-point cut on a $400,000 mortgage is the equivalent of saving around $60 a month or $720 a year.”
Despite Australia’s economy already experiencing record-low interest rates since late 2016, inflation remains worryingly low, wages are still sluggish, and consumption growth is anaemic.
The RBA’s decision to cut the rate to 1.25 per cent – a level never before seen in the modern era – has officially pushed the economy into a new rate-cutting cycle.
The other major banks will face pressure to pass on the full rate cut to customers with mortgages.
And we can already prepare to see another rate cut this year.
Last month, the RBA governor Philip Lowe said he expected the economy’s growth rate to pick up from 2.3 per cent to 2.75 per cent by the end of this year, while maintaining a steady unemployment rate, but that that forecast was built on the assumption that he would cut rates twice this year.
Economists think the next cut could be delivered in August.
Mr Lowe said today that despite strong employment growth over the past 12 months, rising participation and reports of skills shortages in some areas, there has been “little further inroads” into the spare capacity of the labour market recently.
In fact, the unemployment rate ticked up to 5.2 per cent in April.
That means the economy can sustain a lower rate of unemployment before inflation begins to rise meaningfully.
“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy,” Mr Lowe said in a statement.
“It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”
The RBA tries to keep the annual inflation rate sitting within a 2 to 3 per cent range over time, but inflation is just 1.3 per cent.
It is trying to spur inflation growth because it doesn’t want our expectations of the inflation rate to be stuck at such low levels – otherwise it will be harder for inflation to rise.
“The RBA board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time,” Mr Lowe said.
But while the banks are under pressure to pass on the RBA cut in full, some experts are sceptical that they will, as the banks continue to look for ways to recover loss profit margins eroded by previously high funding costs.