RBA December cash rate announcement: A gentle economic turning point

For the second consecutive month the Reserve Bank of Australia (RBA) has decided to keep the cash rate on hold at 0.75%.

The RBA appear to be following November’s narrow decision to maintain the current rate and make an assessment ‘once more evidence of the effects of the earlier monetary easing had become available,’ as per the RBA’s minutes.

A billion-dollar question: Have the three rate cuts made a difference?

The Reserve Bank’s three cash rate cuts are having measurable affects on the housing market, but consumer spending has not followed as intended.

Each month Commonwealth Bank releases a report on Household Spending Intentions (HSI) index based on an analysis of transaction data and Google searches.

Apart from home buying, the report covers approximately 55% of Australia’s total consumer spend across: retail, travel, education, entertainment, motor vehicles and, health and fitness.

Commonwealth bank on corner of Margaret street, CBD area with crowd of people walking across street. Commonwealth bank is one of largest bank people use in Australia. Australia:15/04/18

Commonwealth Bank’s latest report based on October shows many Australians plan to put their money towards property, with home-buying at its highest since 2017.

“The sharp upswing in home-buying intentions continues and intentions are now approaching the record highs seen in early 2017,” CBA’s chief economist Michael Blythe said.

“The ongoing improvement in the home-buying intentions series indicates that the low point for residential building construction will probably be around mid-2020.”

With unemployment in the construction sector feared to be one of the major threats to the economy, this would be a positive development to policymakers.

While Commonwealth Bank credits the RBA’s rate cuts for lifting the market, the same cannot be said for general consumer sentiment.

Retail spending has slightly risen but the improvement is modest, particularly against record low interest rates, job growth and tax rebates.

‘Gentle turning point’ in the economy

While falling interest rates have boosted the housing market, as anticipated, Mr Blythe argued that it may not be all good and could instead have perverse effects on the economy.

“The latest edition of the Commonwealth Bank HSI series, which incorporates data to the end of October, supports the RBA’s view that the economy has reached a ‘gentle turning point’,” he noted.

“But the improvement is quite modest given the size of tax rebates and interest rate cuts delivered in recent months.”

“By fuelling fears about the economic outlook, rate cuts are probably blunting some of the potential boost from tax rebates and rising house prices.”

More calls to bring forward government tax cuts

Experts from two of Australia’s big four banks believe the Morrison government should bring forward their tax cuts to boost the economy.

Economists from Westpac and Commonwealth banks believe the indelible push for a budget surplus is “sucking” money from high taxed-consumers, and consequently the economy.

Both banks agreed the government should not solely rely on interest rate reductions and the recent tax offset for middle to low income earners. This is a belief iterated by many before, including shadow treasurer Jim Chalmers.

Westpac and Commonwealth bank economists even went as far as to say a continued stagnation of the economy could result in a deeper economic problem without immediate action.

The re-elected Morrison government intend to unfold its $158 billion tax plan over seven years. The next stage is not slated to start until 2022 or 2023 which would raise a threshold for a 19% tax to $45,000 and the 32.5% tax threshold will rise to $120,000.

These plans were developed under the belief the economy would be in a stronger place with lower rates of unemployed and income growth in a better place. But with continued under-performance in economic, income and employment growth, the decision to pull tax cuts forward appears increasingly more logical.

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