The RBA says it was conscious of the ‘strengthening conditions in the housing market’ when it decided to lower the official cash rate to 2.75% earlier this month, but also noted that, thus far, credit growth had remained subdued - and haven’t backed away from the potential for even further reductions.
“Taking all the factors into consideration, the Board decided that some of the scope to ease policy should be used at this meeting. It judged that a further reduction in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.”
The meeting minutes, released yesterday, outline an overall improvement in dwelling buying conditions, rising house prices and an up-tick in new dwelling development.
"Indicators of consumer sentiment were above average levels, with reported buying conditions for dwellings and motor vehicles at relatively high levels…Dwelling prices were around 4% above their trough in mid-2012 and auction clearance rates had increased,” read the May 7 meeting minutes.
Looking ahead, the RBA says it expects expects ‘moderate growth’ in housing investment, along with growth of resources exports and a pick-up in consumption offsetting 'the slowing in overall business investment, given the peak in the mining investment boom along with the effects of fiscal consolidation and the high level of the exchange rate'.
The decision to cut the cash rate was taken despite the household sector responding to low interest rates with overall economic growth “expected to be somewhat below trend for a while” and the inflation outlook “revised down slightly”.
“Increasingly, the household sector had shown signs of responding to these low rates: wealth had been bolstered by higher equity and dwelling prices; measures of consumer confidence were above average; housing and personal loan approvals had been rising, although credit growth remained subdued to date; and dwelling construction activity was growing.
“At the same time, however, conditions in the business sector, as assessed in surveys, generally had remained below average, possibly in part because the exchange rate had remained high despite lower export prices and interest rates,” read the minutes.