Interest rates cut as
Reserve Bank acts to lift economy
- Official rates cut at first meeting of the year
- Economic decline drives Bank to act after 17 months sidelined
- Housing market activity remains modest - except Sydney
- More cuts if economy continues to weaken
At
its first meeting for the year, the Reserve Bank unsurprisingly announced that
official interest rates would be cut to a new 60 year low falling by 0.25
percent to 2.25 percent.
Today’s
actions by the Reserve Bank follows 17 months on the sidelines since it last
cut rates in August 2013. The Bank’s
decision reflects concerns over deteriorating economic activity clearly evident
over the past 6 months. Lower interest
rates have been implemented to stimulate a weak economy and restore consumer
confidence.
Although
ABS unemployment data for December was encouraging, the series has been
volatile recently and overall jobless numbers remain relatively high.
Other
recent economic indicators such as house building approvals and retail sales
remain underwhelming given the significant stimulus of lower rates over the
past 2 years. Lower inflation over the
December quarter reflects subdued economic activity notwithstanding reduced
fuel costs and will act to further constrain already flat incomes and profit
growth.
A
significantly lower dollar, a largely directionless stock market, lower
resource prices and growing concerns over the performance of the international
economy will act to keep a downward bias on interest rate settings over the
shorter term.
Housing
market activity remains modest to moderate generally with the exception of the
strong Sydney market. Despite lower
interest rates, market activity is likely to remain largely benign over 2015 as
the impact of improved affordability is offset by low incomes growth and
concerns over job security.
Notwithstanding
housing market activity, lower rates if passed on by the banks to mortgage
holders are good news for home owners despite it signalling growing concerns by
policy makers over Australia’s economic outlook.
Dr
Andrew Wilson is Domain Group Senior Economist Twitter@DocAndrewWilson
