Rate cut gives households temporary reprieve as RBA warns on wages

The latest rate cut has further exposed Australia’s productivity woes ahead of the government’s upcoming economic roundtable.

The Reserve Bank of Australia (RBA) yesterday wiped a further 0.25% off the cash rate in its third cut of the year, securing the lowest rate for Australians since April 2023.

Multiple banks moved quickly following the decision, with Commonwealth Bank the first of the big four to announce a new lowest variable rate of 5.39%, available on its digital-only home loans. 

While treasurer Jim Chalmers has pegged the cut “a very welcome relief” for mortgage holders, The Australia Institute says the move comes too late.

“While 3.60% will provide long-overdue relief for mortgage holders, it should have happened five weeks ago,” senior economist Matt Grundoff said. “Borrowers should have been celebrating back-to-back cuts.”

Instead, positive sentiment around the cut faces being crushed under the weight of domestic economic troubles.

Annual wage growth in Australia stayed steady at 3.4% in the year to June, despite a small 0.8% uptick in the quarter. 

The latest Wage Price Index is in line with the RBA’s prediction, with governor Michele Bullock issuing another warning on productivity.

“The implication of slow productivity growth is that real wages can’t grow as quickly,” she said.

Productivity blues

Further rate cuts for borrowers through 2025 and 2026 are still unanimously anticipated after the August cut, though an exact timeline remains unclear while economic uncertainty persists.

Following July’s surprise rate hold, productivity concerns were again at the centre of the RBA’s post-cut press conference this week.

Governor Michele Bullock brushed off a barrage of related questions, trying instead to push conversation back to rate cuts.

The RBA moved to downgrade the long-term outlook for productivity growth this month, pointing to high labour costs and lack of pick up.

With the Reserve Bank’s warning that the domestic economy will be unable to grow sustainably at more than 2% per year, the risk of inflation creeping up remains heightened.

“Our poor productivity continues to make the job of economic recovery harder,” Australian Industry Group chief executive Innes Willox warned.

“Until there is more clarity on landing points, we need to be alert to the ongoing risks faced by Australia’s trade-exposed industries.”

Monetary policy will need to remain relatively cautious to counter a slow economy, meaning pricing in the RBA’s next moves is difficult.

“Monetary policy is inching closer to ‘neutral’ territory,” Deloitte Access Economics partner Stephen Smith said. “While important, the Reserve Bank controls only one lever of economic policy. Fiscal policy and the associated regulatory and tax settings implemented by governments need to do more of the heavy lifting.”

Governor Bullock also pointed the finger at the government during Tuesday’s press conference, saying the productivity slowdown is purely a government matter.

“There is nothing the RBA can do,” she said. “The government recognises this is a big issue and they are tackling it.

While Aussies would like to see back-to-back rate cuts happen, Ray White Group chief economist Nerida Conisbee said some cuts are still likely before December.

Moving slowly and avoiding consecutive cuts will allow the RBA to “maintain ammunition for more aggressive action” if risks pick up again, she added.

When rates are next cut, Athena Home Loans chief executive (CEO) Nathan Walsh says borrowers must be rewarded with the benefits as quickly as possible.

“When the RBA cuts rates, savings should go straight into customers’ pockets, not be held back to boost bank profits,” he told Mortgage Choice. “It should be easing the strain on household budgets.”

Are cuts in vain?

The centre of Dr Chalmers’ recent messaging has been the Albanese government’s commitment to stagnant productivity as its primary focus.

However, mortgage holders may have to continue bearing the brunt of a restrictive RBA in the meantime.

Restrictiveness by the bank to neutralise against high inflation has become drawn out at the expense of borrowers, Mr Grundoff said.

Trimmed mean inflation has been within the bank’s 2-3% target range since the beginning of the year.

“Interest rates are still restrictive,” Mr Grundoff said. “They’re still weighing the economy down and causing unnecessary pain.”

The August rate decision statement from the bank this week highlighted its concerns around how its easing efforts have been met, however.

“There are uncertainties regarding the lags in the effect of recent monetary policy easing and how firms’ pricing decisions and wages will respond to the balance between aggregate demand and potential supply for goods and services, conditions in the labour market and continued weak productivity outcomes,” it read.

Despite this, the positive June quarter inflation figures the RBA had been banking on did secure a cut in a unanimous board decision.

“With underlying inflation continuing to decline back towards the midpoint of the 2–3% range and labour market conditions easing slightly, as expected, the board judged that a further easing of monetary policy was appropriate,” the statement read.

“Updated staff forecasts for the August meeting suggest that underlying inflation will continue to moderate.”

Ms Conisbee says the decision proves the RBA is confident in its management of inflation, notwithstanding the caution outlined in its statement.

“The more pressing concern for Australia continues to be China’s economic slowdown, which is affecting commodity demand and employment in export-dependent parts of the economy,” she said.

Where to for property?

Those on the other side of the home ownership wall will now be faced with higher property prices as the spring selling season approaches.

This could open the door for more consideration for new homes, despite wider construction sector concerns.  

“Another reduction in borrowing costs from today will provide a further boost to home building activity across the country that will ensure ongoing jobs growth and economic activity,” Mr Devitt said.

Alongside the much-needed leg-up new homes building could provide the economy when managed well, Metricon CEO Brad Duggan agree the third rate cut would bolster confidence.

“There’s a large group who have been watching the market closely, waiting for the right moment,” he added. “This cut sends a strong signal that the time might be right to act.”

This article first appeared on Mortgage Choice and has been republished with permission.

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