RBA cut despite housing bubble worries

Stuart Condie
(Australian Associated Press)


The Reserve Bank cut the cash rate to a fresh record low 0.75 per cent despite concerns that ultra-low rates could reinflate Australia’s housing bubble and further undermine savers.

Minutes from the RBA’s monthly meeting on October 1 showed the central bank cut after board members said they had yet to see any stimulatory effect from the two previous reductions or from government tax cuts.

Board members expressed concern that, with housing prices and auction clearance rates already recovering from a two-year decline, property prices might be “overly inflated” by lower interest rates as banks pass on their lower borrowing costs in the form of reduced mortgage rates.

“The negative effect of low interest rates on the income and confidence of savers might be more significant,” the minutes released on Tuesday showed.

“(But) members concluded that these various factors did not outweigh the case for a further easing of monetary policy.”

The board ultimately concluded that lower interest rates would help reduce spare capacity in the economy.

As it turned out, Commonwealth, Westpac, NAB and ANZ only passed on about two-thirds of the October cut in the form of lower owner-occupier mortgage rates.

That led to this week’s announcement that the consumer watchdog will investigate how the majors set rates and other issues around mortgage pricing.

With the cash rate – one of the key determinants of nationwide borrowing costs for consumers and business – already at a record low, the RBA had been holding off from further cuts in the hope of evidence June and July’s twin 0.25 percentage point cuts had helped stimulate spending.

They opted to cut again after failing to spot any signs.

“Members noted that there had not yet been evidence of a pick-up in household spending following the recent reductions in the cash rate and receipt of the tax offset payments, although they acknowledged that it may be too early to expect any signs of a pick-up,” read the minutes released on Tuesday.

While the board acknowledged that quarterly GDP growth in the first half of 2019 was stronger than in the second half of last year, it also said that retail sales had remained subdued in July and that car sales had fallen in August.

Leading indicators also continued to point to a slowdown in employment growth, while members noted weakening growth in the US and slowing economic activity in China.

Capital Economics senior economist Marcel Thieliant said the minutes showed the decision to cut wasn’t an easy one, but that further loosening was nonetheless on the horizon.

“We think that the unemployment rate will climb further to 5.5 per cent next year and think that the bank will cut interest rates to 0.5 per cent in December,” Mr Thieliant said.

However, ANZ economist David Plank pointed out the RBA, which in previous minutes said it “would ease monetary policy further”, now said it was “prepared to ease monetary policy further”.

Mr Plank said this represented a moderation in tone that backed his belief the RBA won’t cut again until early 2020.

The Australian dollar, which was worth 67.72 US cents immediately before the 1130 AEDT release of the minutes, was worth 67.74 at 1530 AEDT.


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