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WILL THE RBA CONTINUE TO CUT RATES?



So how much further can rates really drop and what impact will it have on property prices?


Following the RBA meeting on the 1st October 2019, the official cash rate was cut by 25 basis points to 0.75%; reiterating it's desire to maintain the status quo in the facing of growing global economic headwinds.


Recently, the escalation in the trade war between China and the USA; as well as the uncertainty surrounding BREXIT the UK have added to fears of a looming global recession. Evidence of this is seen in the recent performance of the stock market, which has seen losses extend into the tens of billions of dollars, in recent weeks as hold back on investment plans until the smoke clears.


This sentiment is reflected in the September statement on monetary policy issued by Philip Lowe, Governor of the RBA [1].


“The outlook for the global economy remains reasonable, although the risks are tilted to the downside."


“The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans due to the increased uncertainty.”

On the domestic front, economic activity has slowed to the worst levels since the GFC. Our current rate of 1.4% economic growth is well below the expectation for Australia. We have come to expect growth around 3%.


Source: ABS Cat Series 5206.0


According to ABS figures for the June quarter, real GDP grew by 0.5% to be 1.4% higher through the year. In year-average terms, real GDP grew by 1.9% in 2018/19.

In a recent media statement, Treasurer Josh Frydenburg stated:

“The 1.9% is slightly below the budget forecast of 2¼% which is also in year-average terms.In the June quarter, nominal GDP grew by 1.2% and 5.3% in year-average terms for the 2018/19 year. Nominal GDP growth was slightly above the budget forecast for 2018/19 of 5%” [2].


With economic growth slowing to levels not seen since the GFC, the RBA is faced with a unique challenge of weighing up the alternative of further rate cuts in the future, or to consider other instruments impede further deterioration in GDP growth figures.

Following two successive interest rate cuts since June 2019, there has been a sharp uptick in lending; which would suggest a return of money back to property.


According to ABS figures for June, the value of owner occupier loans in the month lifted 5.3%, with gains across every state including a 5.4% increase in NSW and a 3.4% improvement in Victoria.


Investor lending excluding refinancing jumped 4.7%, it's strongest monthly gain since September 2016. Loans for construction slipped 1.6% but there was a 10.7% jump in those to buy newly built homes.


With the share market proving to be highly volatile, it would be reasonable to suggest that investors are electing to invest in property, compared to shares in the present climate.


Should we expect low interest rates to continue?


With growing uncertainty surrounding Global Financial Markets, central banks around the world are implementing strategies which were previously considered unconventional. Already in place in Denmark, Japan and Sweden are negative cash rates.


While a further rate cut before the end of the year is widely tipped, minutes from the June RBA meeting would suggest that more unconventional options are not out of the question.

Addressing parliament on the 4th September 2019, the RBA responded to questions on the topic the possibility of unconventional monetary policy, including quantitative easing.


For the moment, it would seem that the most likely lever to be pulled will come in the form of a further rate drop. This is reflected in the most recent statement for monetary policy which was released by Philip Lowe [3].


“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time”.


Bradley Wearne - General Manager at Meridian Australia

P: (02) 9939 3249

E: brad@meridianaustralia.com.au


References

[1] Statement by Philip Lowe, Governor: Monetary Policy Decision - https://www.rba.gov.au/media-releases/2019/mr-19-23.html

[2] Josh Frydenberg- Statement on National Accounts- June Quarter https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/national-accounts-june-quarter

[3] RBA- Statement by Philip Lowe, Governor: Monetary Policy Decision (September 3rd, 2019)

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