Just as the Reserve Bank's decision to cut the official cash rate to an all-time low of two per cent on Tuesday was widely predicted, so the reaction has been equally boundless – although not universally favourable. As governor Glenn Stevens made plain in his media statement after Tuesday's cut, economic growth continues to be hobbled by weak business capital expenditure in the mining and non-mining sectors and subdued public spending. A reduction in bank interest rates that matches Tuesday's cut of 25 basis points on the official cash rate will spur further borrowing and spending by business and households. Moreover, a lower cash rate should alleviate another major impediment to balanced growth and continued healthy export income: an overvalued Australian dollar.
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In February, when the RBA board decided to lower the cash rate to 2.25 per cent, it expressed concern at the below-trend pace of economic growth and the increased unemployment rate. The quarterly forecasts which formed the basis for this week's decision (and which have yet to be released publicly) would tend to support the view that the Bank's reservations then were well founded. Declining commodity prices over the past year continue to be another cause of anxiety for the bank, though there are signs these may have plateaued. A further upside is that the outlook for Australian household demand and employment has improved since February, while the global economy continues to expand at a moderate pace.
It had been speculated that the rapid growth in house prices in Sydney and Melbourne over the past year might just have stayed a decision to cut cash rates further. Yet, it was always incumbent on the bank to focus on the bigger picture rather than obsess about the possibility of a housing bubble in Sydney, worrying as that prospect might be. In fact, the RBA has already taken steps to prevent a speculative credit boom by imposing tighter controls on bank lending for housing. There is much more that can (and should) be done to cool the overheated Sydney and Melbourne markets. However, it should properly be the state and federal governments doing the heavy lifting, not the RBA.
It was always odds-on that Australia would, at some point, be confronted by falling commodity prices, declining capital investment expenditure in the mining sector, and spare capacity in the economy leading to rising unemployment. Thus far, the Reserve Bank has done a commendable job of containing the economic fallout from the winding down of the mining boom, helped, it has to be pointed out, by a jobless rate which is being held down by historically low wage growth. The bank's success in saving the economy from a hard landing is all the more noteworthy for the fact that the Abbott government has been largely missing in action in terms of supporting fiscal policy, particularly after the debacle of last year's budget. All eyes will now be on Treasurer Joe Hockey next week to see if the Coalition can do its bit to boost the economy.
