Reserve Bank Governor Glenn Stevens is rolling the dice and cutting Australia’s interest rate to 2.5 per cent.

Speculation of the cut had been growing after the release of poorer than expected inflationary and trade figures.

The Australian dollar took an immediate hit at the announcement. The dollar fell more than 1.5 per cent against the Greenback to settle at US 77 cents.

The Reserve Bank explained their decision thus: “The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant decline in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

“Forecasts for global growth in 2015 envisage continued moderate growth.

“Commodity prices have continued to decline, in some cases sharply. The price of oil in particular has fallen significantly over the past few months. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.

“In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak.”

The big fear is that lower interest will add fuel to an already blazing housing market. Borrowers keen to cash in on the low interest will flood the market thereby driving up house prices even further.

Tim Lawless, the head of research of CoreLogic RP Data, doesn’t think the announcement will have the same effect on the housing market as previous rate cuts: “Lower consumer confidence, stricter serviceability requirements for borrowers, tighter lending conditions for investors, affordability challenges and low rental yields are all factors that may contribute to the moderation in housing market conditions over 2015.”

If Mr Lawless is right then the RBAs gamble will have paid off. They want to stimulate the economy without causing a housing bubble.

Shane Oliver, chief economist with AMP believes this is what will happen. “Growth is too low, confidence is subdued, prices for key commodities like iron ore and energy have collapsed, resulting in a much bigger hit to national income than was expected a year ago.”

About The Author

Someone you can depend on to respect you and care for your dog. Let me help you give your dog the life it deserves.

Leave a Reply

Your email address will not be published.