RBA August announcement – How low can rates go?
At today’s meeting, the RBA decided to keep the official cash rate at the historic low of 1%. After 2 consecutive months of cuts, many were wondering if today would deliver another one. But, for now at least, 1% is apparently low enough.
Inflation is showing some healthy signs of improvement in the last quarter, rising more than 0.5% above expectation to 0.6%. It’s still below the RBA’s happy place, but at least it’s heading in the right direction. In annual terms, the inflation rate has risen by 1.6%. This better than expected performance is good enough to take the pressure of the RBA. The back-to-back cuts are enough for now so they can ‘wait-and-see’ what happens in the next quarter.
It seems as though the RBA’s rate cuts were contagious as the US Federal Reserve also cut its rate for the first time in almost 10 years. The move was seen as pre-emptive, protecting the US economy in light of growing tensions between the US and China and the US and Iran. The US cut is unlikely to influence the RBA unless it causes the Australian dollar to start to rise again.
The other good news for the RBA this month is the apparent recovery in house values. CoreLogic’s latest Hedonic Home Value Index showed house values rose by 0.1% across Australia’s combined capital cities. Encouragingly this is the second consecutive month of value increase in Sydney and Melbourne.
We’re not likely to see a rapid return to previous house price peaks any time soon though. Tight credit conditions will keep a lid on prices while allowing the economy to grow more broadly. If house prices do start to rise too quickly, we’re likely to see restraining policies put in place by Canberra.
Low interest rates and stable house prices represent a great opportunity for people to get ahead on their mortgages. People with a high credit rating can take advantage of the low cost of borrowing to start or build on their property portfolio (money has never been so cheap). And for first-home buyers, it’s a chance to catch up to the market and get that all-important first foot on the property ladder. Speak to us if you want to review your home loan options, we’ll make sure you are making the most of the current lending market opportunities.
So what’s next? Well, many are interpreting Phillip Lowe’s eloquent mutterings as suggesting that further rate cuts are likely this year.
In today’s statement, he restated that an extended period of low interest rates would be needed to reduce unemployment and to bring inflation up to its target. Crucially, the RBA said that they are ready to ‘ease monetary policy further’ to achieve its targets. So how low can the interest rate go? One per cent is enough for now, but next month? Watch this space.