RBA cuts cash rate to 3% as consumer spending stalls

The Reserve Bank has cut the cash rate by 25 basis points to 3%, admitting that while consumer spending is expected to grow, a return to “very strong growth” seen in previous years is unlikely.

The decision to cut the cash rate comes on the back of flat retail sales for the month of October, prompting CommSec economist Savanth Sebastian to declare the economy is “treading water”.

“Consumers are holding back on significant purchases. Lower pricing will have to play a part in enticing nonplussed consumers,” Sebastian said earlier today.

At today’s RBA board meeting, governor Glenn Stevens said while consumer spending in Australia is expected to grow, a return to the “very strong growth of some years ago is unlikely”.

“The introduction of the carbon price affected consumer prices in the September quarter, and there could be some further small effects over the next couple of quarters,” Stevens said.

“Partly as a result of that, headline CPI inflation will rise above 3% briefly.

“Looking further ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs.

“A continuation of moderate wage outcomes and improved productivity performance will be needed to keep inflation low, since the effects on prices of the earlier exchange rate appreciation are now waning.

“The bank’s assessment remains that inflation will be consistent with the target over the next one to two years.”

Global growth, meanwhile, is forecast to be a little below average “for a time”, Stevens said.

“The board judged at today’s meeting that a further easing in the stance of monetary policy was appropriate now,” he said.

“This will help to foster sustainable growth in demand and inflation outcomes consistent with the target over time.”

The Australian Chamber of Commerce and Industry said it’s now up to the banks to pass on the full rate adjustment to their customers as soon as possible.

“The banks should not reduce the impact of that stimulus either by delaying passing on the cut or by passing on only a portion of it,” ACCI chief economist Greg Evans said in a statement.

Bank of Queensland has already announced it will pass on a rate cut of 20 basis points.

According to Gary Green, director of Bibby Financial Services Australia, borrowing activity by businesses has been held back by uncertain economic conditions and a lack of confidence.

“The RBA’s credit data suggests that the business sector is struggling and that borrowing costs remain too high,” Green said in a statement.

“A further cut in official interest rates will help boost business confidence and prompt greater levels of investment in all sectors of the economy.”