The market is still betting on further cuts to the official interest rate, despite the Reserve Bank’s decision to keep the cash rate on hold at 2.25% in its board meeting yesterday.
In the Reserve Bank’s monetary policy decision statement, governor Glenn Stevens noted that a “[f]urther easing of policy may be appropriate over the period ahead” to foster sustainable growth.
“In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet,” Stevens said.
1300HomeLoan’s managing director, John Kolenda says the central bank may even have scope to cut the cash rate below 2% for the first time.
“Central banks around the world, most notably China, have been moving their official interest rates south and the
RBA will probably have to follow suit,” he said.
“Mining investment in Australia remains in retreat and other sectors have not picked up the slack so more is likely to be needed to reinvigorate the domestic economy. Further rate cuts may help to get things moving and boost consumer and business confidence, which has not been helped by the uncertain national political climate.”
Housing Industry Association senior economist, Shane Garrett said interest rates should cut be again in April in order to “dispel any uncertainty” about the economy.
However, Kolenda says one concern from the RBA taking interest rates further south after a long period of inaction is whether it overheats the property market, which is already hot in Sydney.
“Any nationwide lift in property prices is likely to result in a hasty correction from the RBA, which is always wary about housing prices,” he said.
“In the short to medium term interest rates should remain at low levels but borrowers should always be prepared for rates to inevitably rise again.”
In the monetary policy decision statement, Stevens noted that the Reserve Bank is working with other regulators “to assess and contain risks that may arise from the housing market.”
