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