Australia’s interest rate cut is more than just an attempt to spark up a flagging economy — one economist believes it’s the end of the old assumptions about how the economy works.
The official interest rate is at a new record low of one per cent, with the Reserve Bank of Australia calling for more infrastructure spending and job creation from the federal government.
But Deloitte Access Economics partner Chris Richardson said the cut was evidence the old assumptions had shifted.
“It used to be the case that if you had an unemployment rate in Australia near five per cent, you’d have a wage growth of four per cent, and inflation would be in the Reserve Bank’s target band of a bit over two (per cent),” he told AAP on Wednesday.
“That’s no longer true. It’s no longer true here, and it’s no longer true around the world.”
With wage growth and inflation both stagnant even despite an unemployment rate of 5.2 per cent, the Reserve Bank wants to reduce it even further.
“Despite the Australian economy having performed reasonably well over recent years, there is still a fair degree of spare capacity in the economy,” Governor Philip Lowe said on Tuesday night.
Mr Richardson suggested the unemployment rate might have to drop below 4.5 per cent to start seeing wage and inflation growth hit their targets. “That’s about 100,000 fewer unemployed. (But) to make the task harder, to get 100,000 fewer unemployed you need to get 200,000 more jobs,” he said. Dr Lowe said the rate cut — coupled with stronger infrastructure spending and job creation from the federal government — should mean lower unemployment and underemployment rates.
Grattan Institute chief executive John Daley said there was clearly surplus capacity in the economy.
“When economic conditions are soft, we don’t see so much of a jump in unemployment as we used to, but we do see big jumps in underemployment,” he told AAP.
Dr Lowe said the government needed to do more to get the economy heading in the right direction, but Finance Minister Mathias Cormann insists its current plans will be enough.
“We are kicking in the same direction as the Reserve Bank is,” Senator Cormann told Sky News.
He pointed to an ambitious free-trade agenda and $158 billion tax cuts package, as well as infrastructure spending and yet more attempts to rein in power prices.
But Labor shadow treasurer Jim Chalmers argues the rate cut proves the government isn’t doing enough.
Only one of the big four banks — ANZ — promised to pass on all of Tuesday’s 0.25 percentage point cut to its variable home loan customers.
But ANZ is playing catch-up after delivering only 0.18 percentage points of last month’s cut, when all the other banks passed it on in full.
This time, Commonwealth Bank and National Australia Bank will cut their variable rates by 0.19 percentage points, while Westpac will cut it by 0.20 points.