INTEREST RATE HITS RECORD LOW OF 1.50 PER CENT

Written on the 2 August 2016

INTEREST RATE HITS RECORD LOW OF 1.50 PER CENT

THE Reserve Bank of Australia has taken the cash rate down 25 basis points to a record low of 1.50 per cent at its meeting today, a move that has been welcomed by the construction and retail industries.

With inflation remaining low, at just 1%, a slowdown in China's growth, low commodity prices, and a glut of new apartments set to hit the market on the east coast of Australia over the next couple of years, the board judged that reducing the interest rate would be the best move for the economy.

Cautious lenders, moderate house price growth, and the large number of apartments being built lead the board to believe that, 'the likelihood of lower interest rates exacerbating risks in the housing market has diminished'.

Eyes are now on the banks to see if they pass the rate cut on to consumers. Commonwealth Bank today decreased its standard variable mortgage rate by 13 basis points, while NAB made a 10 basis point cut.

HIA Chief Economist, Dr Harley Dale, welcomed the decision, saying it would assist the building industry as it peaks this year, and attempts to make a soft landing.

"A further interest rate cut can boost the still modest recovery underway in renovations activity," said Harley Dale. "Meanwhile, the prospects for an orderly decline in new home construction over the next 12 months are aided by today's RBA decision," says Dale.  

"There will inevitably be some speculation of a resurgence in existing property price growth in some Australian markets, but it is unlikely that today's interest rate decision will unleash another wave of frothy demand."

Wilhelm Harnisch, CEO of Master Builders Australia, says the rate cut will help maintain confidence in the new housing market.

"The rate cut should give new home buyers the confidence to enter into home ownership with the prospects of interest rates remaining at current levels for the foreseeable future," says Harnisch.  
"It should also provide first home buyers with confidence to enter into the new housing market for the same reason."

Australian Retailers Association Executive Director, Russell Zimmerman, is hopeful that the Reserve Bank's move will help arrest the slide in retail sales growth.

"Retail spending growth has fallen since the beginning of 2016, with some states, such as Queensland and Western Australia suffering with almost stagnant growth," said Mr Zimmerman.

"This reduction of interest rates will allow consumers greater access to discretionary cash, which we anticipate will result in Australians returning to stores. It's been a difficult few months for many Australian retailers, particularly those in food retailing and household goods.

"It's also crucial that we begin to see some upwards pressure on inflation, with the latest Consumer Price Index (CPI) announced last week indicating growth of just one percent across the board, but much less for most retail categories."

According to Eliza Owen, Market Analyst for Onthehouse.com.au, identified that with US growth below expectation, the Reserve Bank may have looked to buffer against the impact of a rising Australian dollar.

"In the past, the RBA has referenced a high AUD as being threatening to prosperity in exports and potentially stunting GDP growth more widely. With inflation at just 1% in the year to June, there is also an added incentive to keep the currency down so overseas goods become more expensive and create 'imported inflation," says Owen.

"Monetary policy is increasingly being used as a tool to lower the AUD. If the interest rate (or return on the dollar) is low, investors are likely to sell off the Australian dollar creating an oversupply of the currency thus devaluing it."


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