RBA cut could have limited impact

Adam Smith 3 August 2016

RBA cash rate march 2016The Reserve Bank of Australia may not have “much fuel left” to stimulate the economy after yesterday’s rate cut.

The RBA widely followed expectations by cutting the official cash rate to 1.50% yesterday, but the effectiveness of the cut has been called into question. The Reserve cited low inflation and a slowing housing market in its decision.

“The Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting,” the RBA board said in its monetary policy announcement.

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But the cut didn’t prove immediately effective in boosting the market. The ASX 200 yesterday dropped 47 points, with major banks all closing the day lower. Housing Industry Association chief economist Harley Dale said the RBA might be reaching the limits of what it can do with monetary policy.

“The decision was widely, but not universally expected and will not come without some controversy. There is not much fuel left in the rate cut tank,” Dale said.

Still, Dale welcomed the cut, saying it came at a time of “unprecedented” uncertainty in the housing market.

1300HomeLoan managing director John Kolenda said consumers were becoming less responsive to RBA cuts, and that lenders were increasingly influenced by factors outside the Reserve Bank’s control. He accused the RBA of becoming “redundant”.

“Rather than seeing our broader market move positively at once, we now see segments of improvements and others which remain patchy. Nothing works in sync anymore. Many more influences are coming into play, which makes it hard for the RBA to play a significant role.”

The major banks seemed to support Kolenda’s claims, as none of the big four chose to pass on the full 25 basis point cut. Westpac issued a 14 basis point cut, while Commonwealth Bank announced it would pass on 0.13%, ANZ cut by 12 basis points and NAB issued a 0.10% cut.

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