Reserve Bank of Australia Governor Philip Lowe gave some serious hints about another rate cut tomorrow, bringing the interest rate to another historic low at 0.75% — how will this impact Australian borrowers?
Australia’s economy is not as strong as it should be. This can be seen in rising unemployment and slow wage growth. Jason Murphy, economist, said that the RBA’s monetary policies will boost the economy by encouraging consumers to spend and borrowers.
According to his theory, people and businesses should borrow more when interest rates drop. He stated that this would result in more money being sent out and through businesses who then hire more people. It creates a vicious circle.
This allows borrowers reduce their mortgage payments while also saving money. They have more money to spend.
A rate cut can affect the exchange rate, which is good for both exporters and businesses.
“If they do, the greatest risk is that they cause an economic crash in the housing market.” Murphy explained that the RBA has been cautious about lowering interest rates in recent years because it was concerned about house price bubbles.
The RBA took two years to finally move the interest rates. It did it again in June and July. In both cases, it cut the cash rate twice more consecutively to bring it down to 1%.
As the auctions market gets more active, it is easy to see why housing prices have been declining. Murphy claimed that rate cuts aren’t the only reason why house prices have risen so quickly.
He cited the Grattan Institute study which found that house prices have not increased in accordance with rate cuts.
Murphy said that the changes were consistent with July’s changes when Australia’s banking regulator relaxed rules about who banks could lend to and how much.
He stated that this is a double-edged sword. While this means that lower rates will help keep the economy stay afloat, controlling lending restrictions will be a challenge – especially if house prices start jumping to great heights again.
If house prices continue to rise, we can use lending regulations to regulate them. Murphy stated that it was up the politicians to make these lending rules work.
The good news? The RBA doesn’t expect prices to rise in the near future. Lowe stated that house-price rises will not affect future monetary policies.
It seems likely that we will see rising housing prices as construction activity slows but the world’s population grows very rapidly. He said that there are several factors that can drive housing prices.
Lowe said that Australia must have low interest rates for as long as possible to meet its spending and unemployment targets.