What have recent rate cuts achieved?

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October 16 2019
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The Reserve Bank has released the results from the first two rate cuts during its October monthly meeting minutes, revealing the difficult position the central bank is in.

The bank confirmed it is attempting to raise consumer spending, get the construction industry going, and provide punters with pay rises without reinflation of the east coast housing market.

In this balancing act, the central bank explained that it will likely reduce rate cuts again, despite the first 50 basis point reduction not having the desired outcome for consumers.

“Members noted that there had not yet been evidence of a pick-up in household spending following the recent reductions in the cash rate and receipt of the tax offset payments, although they acknowledged that it may be too early to expect any signs of a pick-up,” the minutes read.

Retail sales remained subdued in July and car sales had decreased in August.

The residential construction sector was also noted as having contracted further, with this trend expecting to continue for some time.

The RBA also noted the decline in dwelling investment in June quarter was greater than had been initially expected.

Higher-density approvals declined in July, to be at their lowest level in seven years; detached approvals had also declined in July.

Business investment also decreased a little in the June quarter, which the central bank said was driven by the decline in non-residential construction outside the mining sector.

In more positive news, employment levels did increase in August and remained stronger than growth in the working-age population, with the employment-to-population ratio reaching its highest level since late 2008.

“Members noted that the strong demand for labour had been met by equally strong increase in supply. The unemployment rate had been around 5.25 per cent since April and the underemployment rate had remained above its recent low point,” the minutes stated.

At the same time, the Reserve Bank has conceded subdued growth in wages – implying that there continued to be spare capacity in the labour market over the quarter.

Fears of a bubble

As house prices in key property markets of Sydney and Melbourne do creep up again, “members also noted that the housing market and other asset prices might be overly inflated by lower interest rates”.

Research from UBS has showed investor-led mortgages approved over the last month spiked by 5.7 per cent in the last month, which is the highest increase in investments since 2016.

Owner-occupier loan approvals also rose by 1.9 per cent.

However, the Reserve Bank believes further rate cuts have greater benefit for the economy than the potential risk from not reducing interest rates.

“Financial market pricing indicated that a 25 basis points reduction in the cash rate was largely priced in for the October meeting, with a further reduction expected by mid 2020,” the bank concluded.

nestegg previously questioned the RBA’s logic in using up the national insurance policy against a recession.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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