RBA cuts rates to new record low to kickstart economy

The Reserve Bank of Australia has cut official interest rates to a new record low of 1.25 per cent, injecting stimulus into a slowing economy as it looks to turn around sluggish employment, wages and inflation.

The rate cut, just weeks after the May 18 federal election, marks the first time the RBA has used its central monetary policy lever in almost three years - the longest period of interest rate stability in Australian history.

RBA governor Philip Lowe last month said without a cut in interest rates, unemployment across the country was unlikely to fall much further.

RBA governor Philip Lowe last month said without a cut in interest rates, unemployment across the country was unlikely to fall much further.CREDIT:BLOOMBERG

The central bank held off on a rate cut before the election, but telegraphed its intentions less than a week later when governor Philip Lowe said without a cut in interest rates, unemployment across the country was unlikely to fall much further.

In his statement on Tuesday, Dr Lowe said despite strong employment growth over the past year "there has been little further inroads into the spare capacity in the labour market of late" and "overall wages growth remains low".

"Taken together, these labour market outcomes suggest that the Australian economy can sustain a lower rate of unemployment," he said.

"The outlook for the global economy remains reasonable, although the downside risks stemming from the trade disputes have increased."

The last time the central bank changed interest rates was August 2016, a month after Malcolm Turnbull won the 2016 election.

Tuesday's decision by the RBA board came three hours after the Australian Bureau of Statistics released another month of disappointing retail data on the back of falling house prices and historically low wages growth.

BIS Oxford Economics chief economist Sarah Hunter said the "dismal performance" of the retail sector continued in April. Sales fell 0.1 per cent Australia-wide, with NSW and Victoria leading the falls at 0.4 per cent.

"It clearly highlights the fundamental challenges facing the sector from weak income growth and squeezed margins as a result of competition from online sales," she said.

"The fundamentals remain challenging both domestically and abroad. Momentum in household spending is likely to remain relatively weak as a result of weak income growth and the deterioration of conditions globally will weigh on services exports and could potentially dampen businesses’ investment intentions."

Treasurer Josh Frydenberg, who is grappling with an economy-defining rate cut a day before his second set of national accounts are released, has urged the banks to pass on the full interest rate cut to their customers.

"I expect all banks to pass on the benefits of sustained reductions in funding costs," he said on Monday.

The move was widely tipped by the market, with 96 per cent of economists surveyed by Bloomberg predicting a rate cut and more than 80 per cent pencilling in another by August or September.

CoreLogic's head of research, Tim Lawless, said the rate cut was widely expected but with interest rates already at a record low, the stimulus was unlikely to have the same effect as in the past.

Mr Lawless said it could stabilise the housing market, which has seen prices in some parts of Sydney and Melbourne fall more than 14 per cent over the past year.

"Lower mortgage rates, together with the likelihood of lower borrower serviceability assessments if [the regulator] delivers on a relaxation to the base serviceability rate later this month, as well as renewed confidence following the federal election, are likely to see an improvement in housing market activity," he said.