Disappointing inflation forces RBA to act

by AB02 Aug 2016

The Reserve Bank of Australia has trimmed Australia’s official cash rate to a new record low, dropping it by 0.25% to 1.5% at today’s board meeting. 

Today’s cut is the second the central bank has made in 2016 after it also announced a 0.25% reduction after it’s meeting in May. 

The decision may surprise some, but many had believed the result was a known outcome after figures revealed inflation remained at historic lows in the June quarter. 

Head of research at CoreLogic, Tim Lawless said the low inflation reading, along with the continued resilience of the Australian dollar, were the primary reasons behind today’s decision from the RBA, however, he also said the central bank’s decision was likely made easier given a recent cooling in house price growth. 

“CoreLogic’s hedonic home value index reported a 6.1% annual rise in capital city dwelling values over the year ending July, which is the lowest rate of annual growth since September 2013 and substantially lower than a year ago when dwelling values were rising at almost double the pace,” Lawless said. 

“The annual trend of growth in Sydney has more than halved over the past 12 months, falling from 18.4% in July last year to 9.1% over the past twelve months,” he said. 

Lawless said there is a chance price growth could take off again if the RBA cut is passed on in full by lenders, but he said the central bank likely believes there conditions in the market will continue act as handbrake on future growth. 

“The latest interest decision is likely to keep a base level of demand across the housing market, however, other factors such as affordability constraints, higher supply levels, tighter lending conditions and weak rental markets are likely to see growth conditions continue moderating back to more sustainable levels,” he said. 

If lenders do pass the cut on, Neville Sanders, president of the Real Estate Institute of Australia, believes it will have a significant positive for both borrowers and business. 

“With an official interest rate of just 1.50%, home owners can expect a saving of $20 in monthly payments for each $100,000 of borrowings. For those with a mortgage of $500,000 the RBA Board’s decision means a saving of $100 per month. But it is vital that the lenders pass on this rate cut to borrowers in full,” Sanders said. 

“As well as improving housing affordability a cut in the cash rate will be very important in boosting consumer and business confidence. With recent downgrades in the economic outlook for Australia, it is imperative to have a supportive monetary policy to encourage growth.”