Once again, media madness has picked up full throttle around the Reserve Bank’s decision to cut the official cash rate to a record low 2.25% a fortnight ago.
Conflicting headlines have graced all major media outlets, with some declaring “Good news for home owners”, while others warn of a dangerously “soaring” rise in investment housing loans set to burst our “property bubble”.
So what caused the Reserve Bank to tip toe across that very fine line they seem to have been walking for the past eighteen months? And can we expect more of the same to come?
How low can you go?
If the RBA’s latest monetary policy statement is anything to go by, it appears this latest rate cut is only the beginning.
Given that the first move we’ve seen the central bank make on interest rates since August 2013 was down rather than up, it could be very telling.
But should we be alert, alarmed, or just grateful for more breathing room on those mortgage repayments and a boost to our investment portfolio cashflow?
Optimistically, the RBA observed that very low interest rates were contributing to a pick up in non-mining sector growth, and those recent drops in world oil prices had helped to bolster domestic demand.
“However, over recent months there have been fewer indications of a near-term strengthening in growth than previous forecasts would have implied,” it said.
“Hence, growth overall is now forecast to remain at a below trend pace somewhat longer than had earlier been expected.”
Further cause for concern (and possibly more rate cuts) is the Aussie dollar, which although trending lower on the global stage is still weighing in above most estimates of its fundamental value and causing more economic imbalance.
Shaky employment data, along with an expectation for the economy to operate with “a degree of spare capacity for some time yet,” are additional arguments the central bank presented to support this rate cut, suggesting “domestic cost pressures are likely to remain subdued and inflation well contained.”
Is it enough?
Financial boffins are confident that we’ll see more of the same from the Reserve Bank across 2015.
Domain Group Senior economist Andrew Wilson is one of many who believe another cut is imminent; with these minor quarter point changes having minimal impact when it comes to adding much needed fuel to Australia’s economic fire.
He says when the RBA presented us with a succession of rate cuts between October 2011 and August 2013; we didn’t get all that excited.
“We haven’t had much action from cutting from 4.75 per cent to 2.5 per cent, so I’m not sure what a 0.25 per cent improvement is going to do,” said Wilson.
AMP Capital’s chief economist Shane Oliver, also feels another drop is justified.
“Growth is too low, running at around 2.75 per cent through last year, which is well below potential of around 3.00 to 3.25 per cent, and the level needed to prevent a rise in unemployment.”
Oliver says continuing subdued consumer confidence and an increased focus on using our money to pay down debt, are further indicators that we still seem to be feeling a degree of trepidation about our country’s overall fiscal fortunes.
Add to this the fact that other countries’ central banks are continuing to slash rates to record lows, and Oliver says the RBA will certainly be feeling the pressure to drop our cash rate lower still.
“To the extent it is forcing monetary easing around the world, it adds to confidence that sustained deflation can be avoided. Australia is not immune,” said Oliver.
“As the Reserve Bank wanted to see a continued broad-based decline in the value of the Australian dollar, it had to re-join the easing party lest the Australian dollar rebounded.”
Is it too much?
Of course that increasingly thin line the RBA is walking, attempting to gently rouse economic growth at the risk of over-stimulating certain markets, is no doubt always on Governor Glenn Stevens’ mind.
Last year’s investment borrowing figures likely came up more than once or twice around the central bank’s boardroom table, as economists once again raise the red flag around so-called ‘over heated’ pockets of the housing market.
ANZ senior economist David Cannington told clients, “Investor lending has been charging and today’s data is likely to pique the interest of the Australian Prudential Regulation Authority and the RBA, with investor credit growth already running near the ‘trigger point; of 10 per cent investor portfolio lending growth.”
Meanwhile, on the back of December data that saw investor housing loans as a proportion of all loans soaring to a record 41 per cent, experts are warning the banks to tread carefully when weighing up and managing risk.
“We’ve got to be very careful about this,” said CBA chief executive Ian Narev.
“We’ve been in a low interest rate environment for some time, but we are now in a lower one. All the main financial institutions like us need to make sure we are very careful about that.”
If lenders look to be increasing the inherent risk to Australia’s home lending landscape, chances are the RBA and APRA will act on the threat of introducing macroprudential policy that’s been doing the rounds since early last year.
Either way, the RBA has made the play that they thought most appropriate for the overall Australian economy at this juncture. Now we have to see what the various ripple effects might be and how others respond. As always, only time will tell.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).