RBA expected to keep firing blanks in battle for economy


RBA expected to keep firing blanks in battle for economy
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In the war against a sluggish economy and suppressed inflation, the Reserve Bank of Australia’s solitary weapon appears to have run out of ammunition.

Interest rate cuts are no longer hitting their intended targets, a fact at least partially acknowledged by the RBA’s decision at their first meeting of the decade to keep record low rates at their current level.

RBA Governor Philip Lowe’s post-announcement statement highlighted the quandary facing the Board that determines the nation’s underlying interest rate, currently at 0.75%.

“There are continuing signs of a pick-up in established housing markets … especially so in Sydney and Melbourne,” Mr. Lowe said.

But he went on to offer some contradictory comments.

“The Board remains 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,” his statement concluded.

Therein lies the problem. Lower rates are needed to boost the economy but overheating the bubbling housing markets of Australia’s two biggest cities represents serious collateral damage in the battle.

President of the Real Estate Institute of Australia, Adrian Kelly, said interest rates were currently where they needed to be, but further rate cuts would no longer serve any beneficial purpose.

“The banks are not passing on the full rate cut and what little does reach the homeowner is simply being saved or put towards debt reduction – it’s not being injected into the economy,” Mr. Kelly said.

“It must actually be a bit scary for the RBA right now, with interest rates not working as intended while rates are already at such historic lows.”

Savings and savers

Canstar’s finance expert Steve Mickenbecker agreed further rate cuts were of limited value.

The average variable interest rate for owner occupiers paying principal and interest on a $400,000 loan is 3.76%, which would fall to 3.51% if RBA was to make another 0.25% reduction to the cash rate. This would save those homeowners about $15 a week.

“A cash rate cut at this point wouldn’t stimulate anything other than Sydney and Melbourne house prices, with the banks unlikely to pass on cuts of more than 0.15% and home buyers using this to pay off their home loan sooner rather than spending it,” Mr. Mickenbecker said.

“A steady cash rate will please savers, especially pensioners, who have taken knocks in the last fortnight, with two of the major banks cutting savings rates.

“ANZ’s base savings rate is now down to 0.05%, precariously close to zero.”

REIA’s Mr. Kelly agreed savers were hard hit in the current low rate environment.

“Savers do need help but the situation is not going to change any time soon for them, unfortunately – low interest rates are here to stay for the foreseeable future.”

Fires, viruses and visions

Governor Lowe’s statement made it clear the economic landscape wouldn’t change dramatically, for the better at least, any time soon.

“Due to global and domestic factors, 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.”

Steven Rowley, Head of the School of Economics, Finance and Property at Curtin University, said there was more need to create confidence in the economy than there was for another largely ineffectual interest rate cut.

“The availability of credit has eased, so more people are now accessing the Sydney and Melbourne property markets, and driving up prices,” Mr. Rowley said.

Interest rate cuts were no longer the stimulus to the economy they once were, he said, saying more needed to be done to bolster spending and improve housing markets in other states that were still flat.

“Significant social housing projects would stimulate jobs and the building industry and provide a much needed supply of affordable housing in the expensive capitals.”

“Simply relying on interest rate cuts is no longer enough.

“The corona virus and fires have extracted a major economic cost and will impact GDP, which is probably another reason the RBA has held off on further cuts – they need to keep some wriggle room if these and other unknowns lead to economic deterioration down the track,” he said.

As an associate professor, he was also aware of the risks presented to the education sector.

“The corona virus is particularly wreaking havoc on the education sector and this has a knock-on effect on the student housing market, the rental market and economy more broadly.”

Looking ahead, REIA’s Mr. Kelly said that despite his reservations about further interest rate cuts, the RBA was still looking likely to proceed with them.

“It would come as no surprise if there were two further cuts of 25 basis points in the coming year, despite the lack of deflationary pressures on the Sydney and Melbourne property markets.”

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