Money Finance News Reserve Bank leaves the cash rate at record-low 1.5pc
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Reserve Bank leaves the cash rate at record-low 1.5pc

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Consequently, Australia’s household debt to GDP ratio is amongst the highest in the world.
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An optimistic Reserve Bank has kept the official cash rate on hold at 1.5 per cent at its first meeting of 2017, but some experts predict further cuts are in the works.

In his official statement, Governor Philip Lowe said he expected the Australian economy to have returned to “reasonable growth” when the December quarter figures are released in March.

“The Bank’s central scenario remains for economic growth to be around 3 per cent over the next couple of years,” he said.

“Growth will be boosted by further increases in resource exports and by the period of declining mining investment coming to an end.

“Consumption growth is expected to pick up from recent outcomes, but to remain moderate. Some further pick-up in non-mining business investment is also expected.”

This marks the fifth consecutive meeting that the RBA has held the official cash rate. It last cut rates in 2016: by 25 basis points in May and a further 25 points in August.

The decision came as no surprise to economists, but many are also predicting further cuts later in the year, as Australia struggles for growth.

The official cash rate, which the RBA uses to attempt to cool or stimulate the economy, remains at its lowest in Australian history, reflecting poor economic conditions.

The central bank’s decision to make no change is despite the latest inflation result for the December quarter, annualised at 1.5 per cent, missing the RBA’s ‘medium term’ target of 2-3 per cent — the ninth consecutive quarter it has undershot.

The RBA was also unmoved by the surprise economic contraction in the September quarter, raising the prospect of Australia’s first recession in 25 years if the December quarter also comes in negative.

Adjusted for inflation, gross domestic product (GDP) fell 0.5 per cent July and September, pulling down the full year growth figure to just 1.8 per cent.

Unemployment has also edged up slightly to an 11-month high of 5.8 per cent — although this was attributed to a rise in the number of people looking for work, rather than job losses.

Looming cuts?

Experts at ME bank said the Reserve Bank may still cut rates later in the year because of weakness in the labour market.

The bank released new figures this week calculating that job insecurity is at a record-high, underemployment rising, and only 32 per cent of households reported income gains in 2016, based on a survey of 1500 people.

A record high 56 per cent of households also felt they would struggle to find a new job within two months if they became unemployed, an increase of 3 points over the past year, ME found.

Dr Stephen Anthony, chief economist at Industry Super Australia, has also predicted the central bank will be forced to cut rates twice this year: 25 points in the first half and 25 points in the second, which would bring the official rate to 1.0 per cent.

Historic_cash_rates

Low rates = high house prices?

Former RBA governor Glenn Stevens warned in 2012 that using ultra-low rates to clean up after the global financial crisis could bring “its own toxic consequences”.

He was referring to the propensity for the prices of assets, especially real estate, to rise as rates fall. This is known as the ‘search for yield’, where low rates erode returns, forcing investors to borrow more and more to bid for increasingly in-demand investments.

glenn stevens reserve bank
Glenn Stevens warned that ultra-low rates can have disastrous side effects. Photo: AAP

Since November 2011, the RBA has cut the cash rate by 325 basis points.

The OECD, a global organisation that promotes economic development, warned in late 2016 that low rates posed a substantial risk to Australia’s property market.

“Despite the employment of macro-prudential measures to cool the housing market, the net gain from monetary easing has narrowed. Significant housing market concerns remain and there is growing discord between financial market developments and rest of the economy due to the low interest rate environment.”

The OECD said Australia’s central bank should lift rates towards the end of 2017 in order to “unwind tensions” in the property market.

However, Industry Super Australia’s Dr Anthony has previously said that “very little” of the cut may be passed on to borrowers because the big banks are currently lifting their rates out of cycle due to the rising cost of wholesale funding.

So, any Reserve Bank cuts may not stoke the market as the OECD fears.

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