Ensure you never miss an issue of the
real estate business bulletin
RBA hints at more rate cuts

RBA hints at more rate cuts

by James Mitchell 0 comments

The Reserve Bank’s statement on monetary policy for February suggests the cash rate is still not low enough.

Prior to the February board meeting, the cash rate had remained at the same level since August 2013.

The RBA observed that the interest rates affecting households and firms had declined a little over this period, and that very low interest rates have contributed to a pick-up in the growth of non-mining activity.

The recent significant fall in oil prices, if sustained, will also help to bolster domestic demand, it said.

“However, over recent months there have been fewer indications of a near-term strengthening in growth than previous forecasts would have implied," the statement said.

“Hence, growth overall is now forecast to remain at a below-trend pace somewhat longer than had earlier been expected.”

Accordingly, the RBA expects the economy to be operating with “a degree of spare capacity for some time yet, and domestic cost pressure is likely to remain subdued and inflation well contained”.

In addition, while the Australian dollar has depreciated, it remains above most estimates of its fundamental value, particularly given the falls in key commodity prices, and so is providing less assistance in delivering balanced growth in the economy than it could, the central bank argued.

In November 2014, the RBA forecast growth through 2015 of 2.5 per cent to 3.5 per cent.

“This forecast has now been lowered to 2.25 per cent to 3.25 per cent,” Westpac Group chief economist Bill Evans said.

“That is, the mid-point has been lowered from 3.0 per cent to 2.75 per cent. This 0.25 [percentage point] loss of growth is expected to be concentrated in the first half of 2015.

"Forecast growth in 2016 has been maintained at 3.5 per cent (mid-point),” he said.

Mr Evans said these growth forecasts are significant because the revised forecasts incorporate: the expected impact of the 0.25 per cent rate cut announced on 3 February and, critically important, “the assumption that the cash rate moves broadly in line with market pricing at the time of writing”.

“Market pricing currently envisages a further full 0.25 per cent cut plus another possible 10 basis points,” he said.

“In short, the RBA is expecting that growth in 2015 will still be below trend despite the current rate cut and the market's expected further rate cuts.”

Domain Group senior economist Andrew Wilson said another cut is likely, given that the economy received minimal stimulus from the succession of rate cuts between October 2011 and August 2013.

“We haven’t had much action from cutting from 4.75 per cent to 2.5 per cent, so I’m not sure what a 0.25 per cent improvement is going to do,” Mr Wilson told Residential Property Manager's sister publication, Mortgage Business.

“Certainly the Reserve Bank had to act – it’s really the only tool in the box that we’ve got left,” he said.

AMP Capital chief economist Shane Oliver said the Reserve Bank had been forced to cut rates – and that there were good reasons for it to cut again.

“Growth is too low, running at around 2.75 per cent through last year, which is well below potential of around 3.00 to 3.25 per cent, and the level needed to prevent a rise in unemployment,” he said.

“Confidence is subdued, having well and truly given up the post-2013 federal election boost.

“Partly reflecting this, consumers have started to become more focused on paying down debt again, which is a sign of increasing caution and will threaten spending if sustained.”

Mr Oliver said the Reserve Bank would also be feeling the pressure from the rate cuts being made by the central banks of many other countries.

“To the extent it is forcing monetary easing around the world, it adds to confidence that sustained deflation can be avoided. Australia is not immune,” Mr Oliver said.

“As the Reserve Bank wanted to see a continued broad-based decline in the value of the Australian dollar, it had to re-join the easing party lest the Australian dollar rebounded.”

While the economy continues to cool, homeowners are expected to benefit as lower fuel prices and cheaper lending rates put more money in their pockets.

All four of the major banks have now passed on the RBA rate cut in full.

RBA hints at more rate cuts
lawyersweekly logo
promoted content
Recommended by Spike Native Network
Listen to other installment of the Real Estate Business Podcast
reb top 100 agents 2017

The REB Top 100 Agents ranking is the foremost ranking of agents in Australia. It has set the bar for excellence in Australian real estate. To be ranked as an REB Top 100 Agent is the standard real estate professionals strive for. See the full 2018 ranking here!

featured podcast

featured podcast
An industry where the resilient succeeds

Tim Heavyside believes that a strong support team and good foundations are paramount to success in the real estate industry, and with regu...

View all podcasts

Would you consider working for Purplebricks or a similar 'DIY' model?

Yes (7.2%)
No (80.9%)
Perhaps - make me an offer (12%)

Total votes: 209
The voting for this poll has ended on: July 13, 2018
Do you have an industry update?