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August 4, 2016

On Tuesday the Reserve Bank of Australia (RBA) cut the official interest rate by a quarter of a percent to an all-time record low of 1.50 percent. The widely anticipated move is part of the Central Bank’s attempts to tackle the low inflation rate which, at 1.0 percent, is at the lowest level in 17 years and well below the RBA’s official target band of 2 percent to 3 percent.

Initially reticent to cut the cash rate, the RBA is widely seen to have been left with little choice after a number of other major economies continue to maintain policy rates of close to zero, says JLL’s Head of Research in Australia, Dr David Rees.

“Ideally the RBA would like to see the Australian dollar exchange rate drop below the current US$0.75 in a bid to stimulate economic activity and partially compensate for declining commodity prices.”

While the major banks responded by slightly reducing home mortgage rates, Dr Rees believes the cut will actually serve to prolong the current boom in house and apartment prices. Indeed, many cited rising house prices in the argument against cutting rates further.

“The RBA doesn’t seem too concerned about the impact of the cut on the residential housing market,” he says “The latest house price data shows a slowing in the rate of increase in prices and the large construction pipeline is likely to see prices stabilize as projects reach completion. Offsetting the decline in mortgage rates, the major banks in Australia are under regulatory pressure to limit the growth of mortgage lending and tighten up on lending criteria, particularly to investors.”

The RBA statement accompanying the rate cut announcement noted: “The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.”

And, despite the record-low levels, Dr Rees doesn’t foresee any negative impact on the wealth of foreign investment opportunities within Australian shores.

“Foreign investment into the Australian market is unlikely to be affected by this latest move – despite the cut, interest rates and property yields in Australia remain significantly higher than all other developed economies,” he says

Most economists believe that this latest cut will be the last in the current interest rate cycle.

“With the U.S. Federal Reserve expected to lift rates sometime over the next few months and the Australian economy continuing to deliver steady, if unexciting, growth, the scope for monetary policy to stimulate increased activity and consumer prices is limited,” concludes Dr Rees.

David Rees
Head of Research, JLL Australia

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