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Recent cash rate reductions have had a positive effect on the housing market, RBA governor, Philip Lowe, said in a speech yesterday, but further interest rate cuts are not off the cards.
In an address to the Australian Industry Group 13th Annual Economics Forum, Low said the overall rise in the household savings rate from ‘zero to around 10%’ for the past several years was a major factor in keeping the domestic economy steady in light of the mining investment boom.
“In general, the initial responses to a loosening of monetary policy would be expected to include stronger asset prices, improved conditions in the housing market, a lift in consumer confidence and a lower exchange rate. Much of this does appear to be occurring.”
Lowe went on to say house prices have increased by roughly 4% nationwide since mid-last year, after having declined for nearly 18 months previously.
#pb# “Home lending approvals and auction clearance rates have both risen…Despite what one often hears, households do appear to be feeling better about both their finances as well as Australia's medium-term prospects.”
Lowe said the decision by Australian households to increase their savings was the ‘second broad factor after the flexible exchange rate that has ‘helped maintain domestic balance during the once-in-a-century investment boom’.
“Now I know that this increase in household savings has not been universally welcomed by the retail sector. It has caused difficulties for some businesses, including those that based their business models on a continuation of the earlier trends. But consider how the economy might have looked over the past few years had households spent an extra $90 billion each year.”
However, Lowe was eager to stress that monetary policy can’t make the various global factors driving our economy ‘go away’.
“Monetary policy cannot, nor should it attempt to, prevent structural change from occurring. What we can do is deal as best we can with the hand that the global economy has dealt us...It is not a matter of simply changing interest rates today and seeing an immediate response tomorrow."
Another complication, says Lowe, is that the environment in which interest rates are being adjusted isn't the same from one interest rate phase to the next.
"As a result, the exact way that movements in interest rates are transmitted to the economy can change over time. All this means that, as always, we need to monitor things very closely. At the moment though, the available evidence does suggest that lower interest rates are doing their work broadly as expected.”
