The Reserve Bank Board has decided to lower the cash rate by 25 basis points to 1.25%. The Board was of the view that this will support employment growth and thus spur the economy on. Let’s look at what this means for you.
Why was the decision made? According to the ABS unemployment trend measure, unemployment rates currently stands around 5.1% and around 5.2% in April. The RBA would prefer to have this at 4.5%. Therefore, there’s the assumption that a lower interest rate market should encourage businesses to invest in human capital and increase hiring activities, increase wages which may intern increase spending, thus a boost to inflation and reduction in unemployment.
Despite signs of reasonable global growth, the US-China trade war, and other Geo-political issues in the global markets have increased uncertainties in the marketplace thus dampening the global growth outlook. This has also dampened growth outlooks for the Australian economy.
Although the housing market was not a direct factor in the consideration, they do indirectly matter as any spare capacity is likely to generate spending activity which intern could generate economic activity.
What does this all mean?
The RBA hopes that today’s decision will assist in making further inroads into the spare capacity in the economy. This should assist with faster progress in reducing unemployment and create a more assured path towards achieving activity in the market.
With most households seeing a stagnation in wages, there’s been the reluctance to spend more. The central idea here is that with an ease in cost of borrowing, Banks may pass on part of or all of the cut which should increase household disposable income thereby increasing household consumption.
All said and done, the RBA’s decision today reflects the current state of the market. Much as a lower interest rate should -in theory – boost economic activity It is also a constant reminder of uncertainties in the marketplace – low growth. It is a reminder to constantly review your investment strategies to ensure they remain relevant in current conditions.
This article is a general interpretation of the rate cut decision. It is not specific to your personal circumstances and you should not take any action without considering your personal circumstances and seeking professional Financial Advice.