Chief economist update: The rate cut Australia has to have

Reserve Bank of Australia governor Philip Lowe is set to be remembered in history as the man who took Australia's official cash rate from a historic low of 1.5% - set under Glen Stevens one month before he stepped down as RBA head honcho in September 2016 - to a new record low of 1.25% at 1430 hours (AEST) today.

For sure, there are (very) few dissenters arguing the Australian central bank should steel its nerves and stay put, but the widespread consensus is  the RBA will announce a 25 basis point reduction in interest rates today.

I'm in with the rate cut camp - do it early to avoid having to do it by more down the track (using the same rationale central banks' spit out when raising interest rates).

We heard this song before. Deloitte Access Economics director Chris Richardson echoes the familiar refrain, saying: "A cut now could weaken our ability to fight back against a serious economic threat down the track."

Nah Chris, administer a small dose of the medicine now so you don't have to roll out the defibrillator to get the patient's heart pumping again. A stitch in time saves nine, Chris.

A small 25 basis point reduction in borrowing costs - especially perfectly timed with the Australian Prudential Regulations Authority's (APRA) announcement its ditching its minimum 7% serviceability interest rate banks are required to apply when lending to borrowers (on top of doing away with its restrictions limiting banks' loans to 30% of new interest-only mortgages and and dropping its annual 10% lending growth cap) will go a long way towards slowing/stopping/reversing the fall and fall in property prices.

Not to mention the Labor Party's defeat at the May elections and its proposal to limit negative gearing and halve the capital gains discount from 50% to 25% ... and ScoMo's promised personal income tax largesse.

As I've previously discussed, the property market has a large multiplier effect on the economy. It creates jobs in construction and other ancillary industries - legal, banking, furniture and white goods retailing, landscaping, etc. A reversal or even just a stoppage of the rising trend decline would help slow/halt the weakening momentum in the Australian economy.

Wait, there's more! Note the Aussie dollar's depreciation has eased from down 2.3% versus the USD and down 1.7% on the TWI in late May to just minus 1.2% and minus 1.0%, respectively, to date.

This is because US interest rate expectations have also come down. They have already been receding in over the past few weeks but president of the St. Louis Federal Reserve Jim Bullard's recent speech before the Union League Club of Chicago stated: "A downward policy rate adjustment may be warranted soon to help recenter inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown."

The Australian dollar's depreciation shielded this 'lucky country' from the downdrafts of the Asian currency crisis and the collapse of Long-Term Capital Management and Russian default in 1997/98; the US recession and the terrorists' attacks on the US in 2001 and the global financial crisis in 2008.

The decline in US interest rate expectations make it a sure bet the RBA will announce a 25 basis point rate cut to 1.25% today.

Read more: RBAAustralian Prudential Regulations AuthorityChris RichardsonDeloitte Access EconomicsGlen StevensPhilip Lowe
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