Borrowers may be in for some extra cash in their wallets, but economists are warning of a potential housing bubble after the Reserve Bank slashed Australia’s official interest rate to its lowest ever level.
Concerns over Australia’s economic growth led the central bank to cut the cash rate by a quarter of a percentage point to 2.25 per cent on Tuesday.
In a statement accompanying the decision, governor Glenn Stevens said sharp falls in commodity prices meant economic growth would remain weak for longer than the bank had previously expected.
In turn, unemployment would peak a little higher than they previously thought, he said.
The latest inflation figures recorded the lowest increase for several years, Mr Stevens said, and the Australian dollar, while lower against the greenback, was still high against a basket of other currencies.
“It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices,” Mr Stevens said.
“A lower exchange rate is likely to be needed to achieve balanced growth in the economy.”
The board decided to cut the cash rate to support demand, Mr Stevens said.
“At today’s meeting, taking into account the flow of recent information and updated forecasts, the board judged that, on balance, a further reduction in the cash rate was appropriate,” he said.
“This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.”
CommSec economist Savanth Sebastian said the cut was a surprise and warned it would push already-record house prices higher, potentially adding to the risk of a housing bubble.
“The RBA is hoping that this rate cut will boost activity and particularly household activity and business investment, but as we’ve seen in the past, the flow on effect seems to be centred on housing,” Mr Sebastian said.
“This rate cut will add further fuel to that already strong housing market.
“It certainly does increase the risks of a housing bubble.”
National Australia Bank senior economist Spiros Papadopoulos said the RBA had clearly judged that the benefits of a cut would outweigh any negative impact on the housing market.
But regulators would need to closely monitor lending practices to contain any risks, he said.
“They’ve seen enough weakness in the economy going forward and the very low inflation outlook on the table now has given them room to be a bit more aggressive on monetary policy,” he said.
“They obviously feel a rate cut will do a lot more good for the economy than it might in increasing risks for the housing market.”
Mr Stevens said the RBA was working with regulators to “assess and contain economic risks that may arise from the housing market”.