House price growth key to RBA rate cut timing

THE RBA has indicated it might move cautiously in cutting interest rates further saying it would need to keep a close watch on house price growth.

THE Reserve Bank of Australia has indicated it might move cautiously in cutting interest rates further saying it would need to keep a close watch on house price growth.

“Given the large increases in housing prices in some cities and ongoing strength in lending to investors in housing assets, members also agreed that developments in the housing market would bear careful monitoring,” the central bank said in the minutes from its February 3 meeting which were released today.

The RBA and the Australian Prudential Regulation Authority have warned about risks associated with strong house price gains. APRA announced in December new guidelines for lending to property investors.

The RBA said it would be important to assess the effects of these measures.

Some economists have warned that pockets of the housing markets are now showing “bubble-like” conditions, making the rate cut potentially risky.

The bank also revealed that it debated whether to cut interest rates at its February 3 policy meeting or wait until March, but chose the earlier date which had the option of communicating its reasons in a quarterly policy statement just days after.

“In deciding the timing of such a change, members assessed arguments for acting at this meeting or at the following meeting,” the central bank said in minutes from the meeting.

“On balance, they judged that moving at this meeting, which offered the opportunity of early additional communication in the forthcoming Statement on Monetary Policy, was the preferred course,” it added.

The RBA cut interest rates by one quarter of a percentage point at the start of the month to a record low 2.25 per cent, its first cut since August 2013, citing falling global interest rates, weak domestic growth and the risk of rising unemployment.

Many in the financial markets were not expecting the cut as RBA Governor Glenn Stevens had indicated as recently as December that interest rates stability remained an attractive option.

Financial markets are now betting the RBA will cut interest rates at least one more time by mid-2015, with some market participants expecting it will continue cutting in the second half of the year.

Still, there was little guidance in the minutes on how the RBA might proceed.

The Australian economy has been hit hard in the last year by falling commodity prices, particularly for iron ore and coal, the nation’s two biggest exports. Investment in resources has collapsed and is yet to be replaced by capital spending in other areas of the economy.

A high Australian dollar had added to the woes of the economy, albeit it has now fall by close to 30 per cent since its historic peaks above parity with the US dollar in 2011.

The Australian dollar has fallen a long way against the greenback, but not so against other major currencies.

“A lower exchange rate was likely to be needed to achieve balanced growth in the economy,” the minutes said.

Mr Stevens told a parliamentary committee on Friday the Australian economy was in need of more growth, with employment data the day before showing a jump in unemployment to its highest level in around twelve and a half years.