Interest rates set to fall to historic low

A RateCity.com.au analysis of over 30 key economic indicators has suggested that there are key reasons that make it likely that the Reserve Bank will today cut the official cash rate to a historic low of 1.50 per cent.

Peter Arnold, RateCity.com.au’s data insight director, highlighted that July’s quarterly inflation figures reflected a “sluggish” trend at 1 per cent for the year to June and 0.4 per cent for the quarter.

“The RBA will be inclined to cut rates after Wednesday’s sluggish inflation figures because when rates are cut, borrowers theoretically have a little more money to spend, which increases demand — and in turn the price — of goods and service,” he explained.

Mr Arnold also commented that while the June unemployment figures showed an increase in the number of full-time employees, overall the labour market growth was below expectations.

“A rate cut [today] could help to stimulate growth and make room for more jobs in the market,” he remarked.

He also pointed to the Federal Reserve’s decision to leave US rates on hold last week and the relatively high Australian dollar as other factors putting pressure on the Reserve Bank to cut rates.

“On top of this, fixed home loan rates continue to tumble, with more than 600 rate cuts in June and July,” Mr Arnold added.

“On average, three-year fixed home loan rates are 0.36 percentage points lower than variable rates and the gap between the two is the widest it has been in over a year,” he said.

“This suggests the lenders are anticipating another cut.”

[Related: Reserve Bank decides on cash rate]