The Australian Reserve Bank has pulled the trigger on cutting official interest rates by 25 basis points to just 0.75% in a decision that looks set to boost the property and share markets and weaken the Australian dollar.
And further cuts seem almost certain as RBA governor Philip Lowe tries to ensure that the Australian economy and the jobs market keep some positive momentum.
Economists now think official interest rates are likely to remain near zero for two years given the RBA board’s determination to boost employment or inflation.
The RBA board stressed that it was keen to stay on top of downside risks and deal with a lack of wage rises and lower than hoped for inflation.
Low rates around the world
“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation,” the RBA board said in its statement.
“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target.
“The economy still has spare capacity and lower interest rates will help make inroads into that.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.
“The board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
Announcement sends stocks up, dollar down
The dovish tone to the RBA announcement and the three 0.25% cuts since June sent the Australian share market up 15 points straight after the announcement with the big banks among stocks to rise on the news while the Australian dollar sagged to a one-month of US67.25c, down 0.35% from where it was trading prior to the announcement.
Markets are now pricing in a 30% chance of a further 0.25% interest rate cut on Melbourne Cup day while the probability of a 0.25% cut next year has now risen to around an 85% chance.
In making the cut and foreshadowing more to come, Dr Lowe and the board have decided to exert maximum downward pressure on unemployment rather than being too concerned about asset bubbles starting as house prices rise.
House values on the rise
Just hours before the rates cut announcement, new figures from Corelogic showed that house values in the country’s two biggest cities surged in value again in September.
The national dwelling price increase of 0.9% for the month was largely driven by a strong rebound in the key Sydney and Melbourne markets, where values were up 1.7% over the month.
The rapid bounce-back of house values saw Sydney up a cumulative 3.3% and Melbourne up 3.2% in the last two months as lower interest rates and easier access to credit push up values.
The RBA may not have been too worried about the house price rises given that the number of properties for sale has been constrained and the number of outstanding house loans are still not rising.
Higher house prices and lower housing interest rates could also help to spur some economic activity as homeowners feel wealthier and the residential construction industry gets a boost.