The Reserve Bank of Australia has cut its cash rate 0.25% to 2.75%, the lowest rate since the 1950s.
In a statement, Governor Glenn Stevens said the RBA’s board “judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.”
The Treasurer, Wayne Swan, said the economy had strong growth, low unemployment and contained inflation. He said there was no comparison between today’s low interest rates and the emergency rates that prevailed during the global financial crisis.
The Shadow Treasurer, Joe Hockey, said the Reserve Bank was showing leadership and doing the “heavy lifting” for the government by responding to a deteriorating economy. He said rates were now beyond emergency levels.
- Listen to Wayne Swan’s remarks (11m) – transcript below
- Listen to Joe Hockey’s remarks (6m)
- Listen to remarks by Peter Anderson, Australian Chamber of Commerce and Industry (4m)
- Interest Rates Since 1990
Text of statement from Reserve Bank Governor Glenn Stevens.
At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.75 per cent, effective 8 May 2013.
The global economy is likely to record growth a little below trend this year, before picking up next year. Among the major regions, the United States continues on a path of moderate expansion and China’s growth is running at a more sustainable, but still robust, pace. Japan has announced significant new policy initiatives aimed at strengthening demand and ending deflation. The euro area remains in recession. Commodity prices have moderated a little in recent months though they remain high by historical standards.
Financial conditions internationally continue to be very accommodative, with risk spreads reduced, funding conditions for most financial institutions improved and borrowing costs for well-rated corporates and sovereigns exceptionally low.
Growth in Australia was close to trend in 2012 overall, but was a bit below trend in the second half of the year, and this appears to have continued into 2013. Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low.
With the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years. There has been a strengthening in consumption and a modest firming in dwelling investment, and prospects are for some increase in business investment outside the resources sector over the next year. Exports of raw materials are increasing as increased capacity comes on stream. These developments, some of which have been assisted by the reductions in interest rates that began 18 months ago, will all be helpful in sustaining growth.
Recent data on prices confirm that inflation is consistent with the target and, if anything, a little lower than expected. The CPI rose by 2½ per cent over the past year, and measures of underlying inflation gave a broadly similar outcome. These results have been pushed up a little by the impact of the carbon price. Growth of labour costs has moderated slightly over recent quarters while productivity growth appears to be improving. This should help to lessen increases in prices for non-tradables. The Bank’s forecast remains that inflation over the next one to two years will be consistent with the target.
Over recent meetings, the Board has noted that interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge. Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased.
The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.
The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.
Remarks by Deputy Prime Minister and Treasurer Wayne Swan on the Reserve Bank’s decision.
TREASURER: Today’s interest rate decision is welcome. What it does show is that interest rates are now even lower under Labor. I think this will be an interest rate cut which is going to be welcomed by families and by small businesses, and I think this is an interest rate cut that they thoroughly deserve.
Today’s cut means that a family with a $300,000 mortgage will pay around $5,500 a year less in repayments compared with when the Liberals were last in government. That is more than $100, more than $100 every week of the year for a family with a $300 mortgage. So it will be, and will continue to be, big savings flowing through to families and of course small business. Can I just say that I am pleased that the NAB and the Bank of Queensland have passed this cut through in full because low rates are good news for families and certainly good news for small business.
Now of course rates are now far lower than they were ever under the Liberal Party who in fact saw a situation where rates went up something like 10 times in a row. I think this will be a pretty big test for Mr Abbott and Mr Hockey. Can they support, say something nice about an interest rate cut, or will they go out there and simply continue to talk down our economy as they do day in day out, week in week out. So I think there is a real test here to see whether they can be responsible enough to welcome an interest rate cut. Because when you look at this rate cut what we have got is an economy with solid growth, low unemployment, contained inflation and lower interest rates. Of course, lower interest rates are playing a very important part in our economy at the moment to help us make the transition from resource sector growth through to non-mining sector growth. If you read the statement from the Reserve Bank today, they point to a number of interesting trends in terms of growth in the non-mining sector and they also point to the fact that the higher dollar and its continued rate is unusual. We all know that the high dollar is putting profound pressure on all sectors of our economy, particularly on the profitability of businesses and of course that then flows right through to government revenue. The unusual circumstances where we now have nominal growth in our economy below real GDP growth is not only reflected in lower profitability for small and large businesses right across our economy but is also having a very significant impact on Government revenues.
I want to make the point that this Government will always, always put jobs and growth first when we come to making economic policy. As we frame this budget we make no apology for the fact that our economic settings reflect the priority that we give to supporting jobs and growth right across our economy. Over to you.
JOURNALIST: Mr Swan, this rate cut is now below what you yourself once described as emergency levels, three per cent. Is there any cause for concern about the state of the Australian economy?
TREASURER: Well I note that last time there was a rate cut we had some commentary along these lines from the Liberal party. And that commentary then as it would be now is utterly irresponsible. To compare the level of interest rates at the height of the global financial crisis to the level of interest rates now is just utterly irresponsible.
As I said to you before, we have solid growth. We have low unemployment. We have a strong investment pipeline. We have strong public finances. We have contained inflation and we have low interest rates. Back then when rates where at that level the dollar was 60 cents, 60 cents. It sits today at around $1.02 to $1.03. That level of the dollar at that sustained high level is one of the factors that reflects our economic strength vis-a-vis the rest of the world. But it brings with it the challenges in the domestic economy, and one of those challenges is it puts a squeeze on profitability across our economy and we are living with the consequences of that now.
These rates are possible because the Government has had in place a responsible fiscal policy over the past five and half to six years. And because we have had responsible economic policy, because inflation is contained, the Reserve Bank is in a position to cut interest rates. To compare this level of interest rates to the circumstances of the Australian economy now to what they were at the height of the global financial crisis is simply utterly irresponsible.
JOURNALIST: But that is exactly what the Reserve Bank is doing today. If you look at the document from their most recent statement they compare the current rate of lending across the economy to where it was at the height of the recession. Are you saying they are irresponsible?
TREASURER: No, I am saying you are in selectively quoting the figures that you have. If I could read from the Reserve Bank statement today, let me just go through it. Let’s just go through what they have got to say: “There has been a strengthening in consumption and a modest firming in dwelling investment, and prospects are there for some increase in business investment outside the resources sector.”
They go on to talk about growth being around trend. The picture they are painting of this economy is in no way similar to the picture of the economy that existed at the height of the global financial crisis. That is the factor that you have to take into account. These rates are coming down because the Government has had a strong fiscal policy over a long period of time, because inflation is contained, and because of those things they are in a position to deploy monetary policy particularly in the face of the fact that we have a higher dollar which in itself is a result of the fact that we have a strong economy.
JOURNALIST: But are you saying that your definition of emergency levels now is different to what it was during the global financial crisis, that three per cent figure?
TREASURER: Well during the global financial crisis global growth had tanked. Global demand had fallen off a cliff. That is not what is happening in the global economy at the moment. Global growth is a bit below trend. Growth in Australia is a little below trend or around trend. To compare those two circumstances is simply to compare chalk and cheese. What we have here is the fortunate combination of circumstances of low unemployment, solid growth, high investment pipeline but we have with it a higher dollar which reflects our economic strength vis-a-vis the rest of the world, bringing with it challenges in domestic economic management which we are handling.
One of the challenges that flows from a higher dollar and our domestic strength, is the squeeze on profits for businesses across our economy, caused by that higher dollar. One of the reasons we are talking about very substantial revenue write-downs in this current year and across the forward estimates is a consequence of what has occurred with the dollar and our domestic strength vis-a-vis the rest of the world. And that is why trying to make any comparison between where Australia is today compared to where it was during the global financial crisis is grossly inaccurate. But given that you have raised the global financial crisis, one of the reasons our economy is so strong now is because of the decision we put in place along with the Reserve Bank to stimulate our economy through fiscal policy and the Reserve Bank through monetary policy to support it during a difficult period in the global economy.
JOURNALIST: Mr Swan, are you upset at some of the Treasury forecasts received back in October predicting a $1 billion surplus and news today that there is a $17 billion dollar hole in Government revenue . Are you upset with those…?
TREASURER: Well not at all. They are some of the finest public servants that have ever served in the Australian public service, who occupy the offices behind me.
I want to make this point and I want to make this very clearly in making economic policy you have to respond to changing conditions and what has changed dramatically in our economy, particularly since the end of last year has been an unusual set of circumstances where real GDP growth has been above nominal GDP growth. And a consequence of that has been a squeeze on profits right across our sector. We have never had a circumstance where the dollar has remained high as the terms of trade have come off. That is what occurred in Australia at the end of last year. As a consequence of those events I fronted up and told the Australian people at a press conference at parliament house at the end of last year in November that there was a squeeze on our revenues. As a result of that squeeze on our revenues we would be unlikely to come back to surplus in 2012-13. This set of conditions has prevailed. In fact, it has got even more significant since that time. The consequence of that is now a write-down in revenues, budget to budget, of $17 billion dollars.
At every step of the way I have informed the Australian people as these circumstances have evolved. That is the backdrop to this Budget. So what do responsible policy makers do in a changing environment,? They stand up, they talk to the Australian people about why circumstances have changed. I have done that on multiple occasions, I am doing it again today and I’ll be doing it in the Budget. And I will be explaining that responsible Governments don’t ignore changes in the events that are occurring around them. They take charge, they respond to them and they put in place the responsible polices for the future. And that is what this Government is doing because it is the right thing to support jobs and growth and to do it in the way in which we are doing it.
JOURNALIST: Treasurer, along those lines, what would you say to families who were going to pocket an increase to the Family Tax Benefit A but now won’t?
TREASURER: Well as the Finance Minister explained this morning, this was a difficult decision but a responsible one. Circumstances have changed dramatically as I have spent some time explaining today. And as a consequence of that we weren’t in a position to proceed with that. No one has lost any money, but we are not in a position to proceed with those additional payments that we thought were possible when the revenue outlook was much brighter. The revenue outlook has changed, the consequence of that is that responsible Governments must change. We have done that and we have done that for the very best of reasons, to support growth in our economy, to support growth in jobs and to make sure that we do the right thing by the Australian people.
JOURNALIST: [Inaudible].. sustained impact on the dollar?
TREASURER: I don’t speculate about the path way of the dollar. But I think you can read the Reserve Bank statement for yourself and draw your own conclusions.
