Sluggish economy could trigger more rate cuts

by Julia Corderoy05 Dec 2014
Slower than expected economic growth of just 2.7% in the September quarter may give the Reserve Bank some ammo to cut interest rates even further to unprecedented lows next year.

Speaking at a media conference after the release of the national accounts – which show Australia may be amidst an income recession – Treasurer Joe Hockey said that it is vital that consumers stimulate growth and create jobs.

“Nominal GDP fell in the September quarter. This was driven by significant falls in commodity prices. As I have said before, this has implications for the Budget. Real gross domestic income has now fallen for two quarters,” he said.

“These National Accounts show that it is important that we continue to implement policies that stimulate growth and create jobs.”

When asked about whether there was any reason why the Reserve Bank shouldn’t cut interest rates to stimulate growth, the Treasurer played coy – although he emphasised the need for a lower Australian dollar.

In the Reserve Bank’s statement of monetary policy decision on Tuesday, the central bank’s governor Glenn Stevens said a lower Australian dollar is “likely to be needed” to achieve growth in the economy. 

Hockey also emphasised the importance of consumer spending to support economic growth, encouraging Australians to go out and spend this Christmas.

“We want Australians to go out there and spend for Christmas, not just for Santa Clause but for Australia. We want that to happen. And why? Because increasing household consumption is good for the economy and that in turn will help to create jobs for other Australians.”

So, if the Australian dollar remains at stubbornly high levels and consumers remain cautious about spending, this could suggest that further cuts to the official cash rate may be the only remedy to motivate consumer spending and restore growth.