RBA slashes interest rates to a new record low of 1.50%

The Reserve Bank has opted to cut the official cash rate to a new record low of 1.50% at its August board meeting.

The RBA last slashed the cash rate in May, following 12 consecutive months on hold at 2.0%.

The result comes as no surprise to economists and academics which said that while the official inflation figures released last week were largely in line with expectations, it did cement the case for the Reserve Bank to cut rates at its next meeting.

Financial markets had bet on a two in three chance of a cut.

Also read: Get ready for the Aussie dollar to fall

As well as low inflation, interest rates and wage growth, Australia, like the rest of the world, is facing low levels of business investment.

Elsewhere, the price of Australian goods and services have risen at its weakest pace in 17 years.

A slowdown in dwelling value growth may have made it easier for the RBA to cut the cash rate for the second time this year, however the primary reason for rates moving lower was likely to be the low inflation reading over the June quarter and the stubborn strength of the Aussie dollar, said CoreLogic head of research Tim Lawless.

“CoreLogic’s hedonic home value index reported a 6.1% annual rise in capital city dwelling values over the year ending July, which is the lowest rate of annual growth since September 2013 and substantially lower than a year ago when dwelling values were rising at almost double the pace,” he said.

“The annual trend of growth in Sydney has more than halved over the past 12 months, falling from 18.4% in July last year to 9.1% over the past twelve months.”

Also read: Why is Australia's inflation rate so stunningly low?

Presuming the cash rate cut is passed on to mortgage rates, Lawless said there is likely to be a renewed level of scrutiny on the housing market, with policy makers wary of a reversal in the slowing housing market growth trend. 

“A resurgence of growth could trigger a new round of regulation from APRA aimed at limiting growth in investment lending and/or tightening loan to valuation ratio requirements for lenders.”

“The latest interest decision is likely to keep a base level of demand across the housing market, however other factors such as affordability constraints, higher supply levels, tighter lending conditions and weak rental markets are likely to see growth conditions continue moderating back to more sustainable levels,” he said.

 

Glenn Stevens, Governor: Monetary Policy Decision

"The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers are supporting the near-term growth outlook, but the underlying pace of China's growth appears to be moderating."

"Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia's terms of trade remain much lower than they had been in recent years.

"Financial markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative.

I"n Australia, recent data suggest that overall growth is continuing at a moderate pace, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators continue to be somewhat mixed, but are consistent with a modest pace of expansion in employment in the near term.

"Recent data confirm that inflation remains quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

"Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

"Supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

"Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting."