RBA Cuts Interest Rate in Bid to Build Economy

Despite renewed optimism and growth in the housing sector, the Reserve Bank of Australia has slashed the official cash rate from 0.25 per cent to a historic low of 0.1 per cent.

RBA governor Philip Lowe said that further monetary easing would be “required for some time” in a bid to tackle weak household spending, rising unemployment and inflation.

“In Australia, the economic recovery is underway and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria,” Lowe said.

“It will, however, take some time to reach the pre-pandemic level of output.”

In its Tuesday announcement, the central bank said it is not expecting to increase the cash rate for at least three years.

The RBA has also embraced quantitative easing to keep longer-term interest rates low in order to assist the recovery of the Australian economy.

In the bank’s central scenario, GDP growth is expected to be around 6 per cent over the year to June 2021 and 4 per cent in 2022.

The unemployment rate is expected to remain high, but to peak at a little below 8 per cent, rather than the 10 per cent expected previously.

At the end of 2022, the unemployment rate is forecast to be around 6 per cent while inflation is forecast to be 1 per cent in 2021 and 1½ per cent in 2022.

The RBA said it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.

“Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago,” Lowe said.

“Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.”

Historically cuts to interest rates have fuelled housing market activity and generally put upwards pressure on dwelling prices.

Housing values increased nationally for the first time in five months, by 0.4 per cent in October, with Melbourne the only capital city to record a fall in values.

The latest lending figures also revealed that housing finance in September was 26 per cent above that of 12 months ago while the number of construction home loans has increased by 64 per cent since May, almost double that of other owner-occupier loans.

Corelogic head of research Tim Lawless said the central bank had looked through the ‘noise’ of higher housing prices in an effort to stimulate business investment, jobs growth and household consumption.

“The stimulus of such extremely low-interest rates, together with the initiatives announced in the federal budget and state-level incentives like stamp duty concessions and building grants, are likely to be enough to outweigh the headwinds facing the market.

“If housing market conditions generate too much risk through rising prices, particularly in the lending space, policymakers might consider other mechanisms that will allow interest rates to stimulate the economy, but keep a lid on house price appreciation,” Lawless said.

Ai Group chief executive Innes Willox warned the rate cut could now add fuel to asset price inflation and reduced incomes for households reliant on interest payments on their savings.

“[Yesterday’s] measures should help keep a lid on exchange rates – at least in the short-term—and this will help preserve competitiveness for exporters and import-competing producers,” Willox said.

“After [yesterday’s] action on monetary policy, any remaining stimulus will be almost totally dependent on fiscal policy measures including through the rapid deployment of infrastructure spending.”

REIA President Adrian Kelly said if the full 0.15 percentage point decrease is passed through to mortgage rates it would increase housing affordability—improving by 1.7 per cent.