Scott Morrison says the budget could take a hit worth billions of dollars but global trend of low interest rates does not mean Australia is struggling

This article is more than 4 years old

This article is more than 4 years old

The treasurer, Scott Morrison, insists the Reserve Bank’s decision to cut interest rates to a new historic low 1.5% does not mean the economy is struggling, but he admits the budget could lose billions of dollars of revenue in this environment.

The shadow treasurer, Chris Bowen, says the rate cut makes a mockery of the Coalition’s “jobs and growth” slogan, because wages are stagnating, and living standards are falling, and the RBA has been forced to take the initiative to stimulate growth because the treasurer won’t.

“Scott Morrison has surrendered economic leadership in this nation to the Reserve Bank,” Bowen said on Tuesday.

The RBA cut the cash rate by 0.25 percentage points to a record low 1.5% on Tuesday, as anaemic inflation of 1% and a slowdown in the housing market cleared the way for record-low borrowing costs.

The RBA’s governor, Glenn Stevens, said the risk of exacerbating problems in the housing market with another rate cut had diminished over the past year, because supervisory measures had strengthened bank lending standards, and banks were being more cautious about who they were lending to.

In a statement after Tuesday’s monetary policy meeting in Sydney, Stevens said very subdued wages growth in Australia, and very low cost pressures globally, meant inflation was expected to remain quite low for some time.



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He also said an official cash rate of 1.5% could would improve the prospects for “sustainable growth” in the economy.

But economists said the RBA has been forced to cut rates because global economic conditions were finally catching up with Australia.

“The RBA is trying to prevent a further fall in inflation expectations that could push wages growth to new record lows and make it even harder to get inflation back to target,” AMP Capital’s chief economist, Shane Oliver, said.

“The latest rate cut is all about adding to confidence that inflation will head back to the 2% to 3% target zone within a reasonable time.”

Morrison said low interest rates, low inflation, low rates of investment, and very low export trade growth, were now a global phenomenon, so the record low cash rate was not a sign the economy was struggling.

“We are growing at 3.1%. Name me five advanced economies that are doing better than that – you won’t,” he told Sky News.

But he also warned that the budget could lose billions of dollars in revenue in this environment because real gross domestic product growth of 3.1% was much higher than the growth in nominal GDP of 2.1%.

“Well we will have our update to the budget at the end of the year and there will be many things that happen between now and then,” he said.

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Bowen said the RBA’s rate cut showed the economic transition was not going well.

“Today the Reserve Bank of Australia has taken the extraordinary action of reducing interest rates to a record low 1.5%, half the rate that was prevalent during the global financial crisis, and a full 1.25% lower than the rate that Joe Hockey declared ‘emergency levels’,” he said.

“The treasurer needs to provide more leadership. The treasurer needs to provide a real plan for our economy. The Reserve Bank cannot do all the heavy lifting.”

The RBA’s move followed disappointing data on house building approvals and trade earlier in the day, and the construction industry is likely to welcome the prospect of cheaper loans for prospective homeowners.

The Commonwealth Bank quickly passed on a cut of 0.13 percentage points to home loan borrowers, while NAB has cut its rates by 0.10 percentage points.

Craig James, chief economist at CommSec, said the decision could mark the moment when the RBA was forced to accept that global trends would force its hand.

“The Reserve Bank is generally seen as a reluctant rate cutter. While central banks in other parts of the world have been forced to reduce rates to near zero, Australia has never been in that position. But these are extraordinary times with technology, ‘disruption’ and an environment of conservatism driving global inflation rates lower.

“The Reserve Bank may be uncomfortable with interest rates at current super-low levels, but these are unusual times. It may end up that interest rates of 1-2% become the norm rather than the exception.”