Australia’s official cash rate has fallen below 1.0 per cent for the first time in history with some economists saying it will stay down for at least another two years.
At its October meeting on Tuesday, the Reserve Bank of Australia made the widely expected decision to drop the rate to 0.75 per cent — the third time it has wiped 25 basis points off since June.
And the cuts are expected to keep coming from Reserve Bank governor Philip Lowe, with another reduction predicted this year and again at the beginning of 2020.
“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation,” he said in his statement.
“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target.
“The economy still has spare capacity and lower interest rates will help make inroads into that.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.”
BIS Oxford Economics chief economist Dr Sarah Hunter said the RBA board projected inflation to remain around 2 per cent for another two years, “which suggests there will not be a rate rise until the end of 2021 at the earliest.”
AMP chief economist said he expected another 25 basic point cut in November and then again in February.
Corelogic head of research Tim Lawless said the strong rebound in Sydney and Melbourne’s house prices did little to sway the downwards trajectory from the central bank.
“A trend towards higher unemployment and a slowdown in jobs growth were likely the primary factors in the RBA’s decision to cut rates to a new low, as well as concerns around persistently weak household spending, subdued wages growth and low inflation,” he said.
“Lower interest rates together with a subtle loosening in credit policies and improved housing sentiment has seen national housing values recover 1.7 per cent of the 8.4 per cent peak to trough decline in value, with a substantially larger bounce in Sydney and Melbourne.”
Mr Lawless says he expects the bounce in housing values to help kick the economy along as homeowners begin to feel wealthier and more confident.
“Stronger housing conditions should also support the residential construction sector where approvals dropped through the housing downturn,” he said.
“Both household spending and residential construction activity have weighed on economic growth, so a turnaround in these sectors would be a welcome turn of events.”
Per Capita research fellow Stephen Koukoulas told news.com.au the RBA is reacting to the soft economy and record low interest rates was a “sign that all is not well”.
However, he stopped short of suggesting Australians should start panicking.
“As the Reserve Bank’s been saying recently, there are a few bright spots in the economy,” he said.
“We know that exports are doing well, we know that private sector business investment is picking up, and we know that infrastructure spending is still being rolled out.
“The concerns are housing construction and consumer spending — both very weak and until they change the economy will stay weak given how important they are.
“It’s an injection of monetary policy stimulus when the economy hasn’t been performing well.”
HOUSE PRICES IN MELBOURNE AND SYDNEY SURGE
A few hours before the RBA slashed the official cash rate, new data from Corelogic revealed the country’s two biggest cities surged in value again in September.
The national dwelling price increase of 0.9 per cent for the month was largely driven by a strong rebound in the key Sydney and Melbourne markets, where values were up 1.7 per cent over the month.
Australia’s two largest cities have recorded a rapid bounce-back in home values over the past two months, with Sydney up accumulative 3.3 per cent and Melbourne up 3.2 per cent in over the last two months as investors gorge on low interest rates and easier access to credit.
The adoption of looser borrowing rules by APRA in July has also helped push house prices higher, a development that has left some concerned over the potential re-emergence of risks to borrowers.
Government, however, has cheered the recent boost in house prices with Treasurer Josh Frydenberg noting a 10 per cent rise in house prices could boost GDP growth by 0.5 per cent.
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