Monday, February 2, 2015

Oz is the latest surprise interest rate cutter | The “latest fad” to be used against a property bubble

The reality that we live in a truly global economy has been brought home by the actions of the Reserve Bank of Australia (RBA) in lowering interest rates last night (GMT). In so doing, the governor, Glenn Stevens, has effectively contradicted some of his own very recent guidance to the effect that stability in rates was to be the order of the day for his central bank.

The rapid and accelerating fall in commodity prices, in particular Iron Ore, so important to the Aussie economy, the oil price collapse, a fall in the employment rate, lower growth in China (such an important trading partner for Australia), falling inflation, but above all the trend in international interest rates and other easing measures (i.e. Quantitative Easing by many), which raises the possibility that triple rated Australia could become another Switzerland in terms of capital seeking a home, militated for the rate reduction.

But it still took the market and most commentators by surprise. The result was, of course, a dramatic fall in the value of the Aussie dollar (see above). This places it at its lowest level in six years against the US dollar.

“The latest fad” to be used to prevent a property bubble

One of the reasons this rate cut is so dramatic is the pressure that exists on the property markets in Australia. House prices have mushroomed and there has been, for some time, a fear of a property bubble Down Under. So-called macro-prudential policies, which would place restrictions on mortgage lending but which were described by Mr. Stevens at a governmental economic committee last August, as “…the latest fad, internationally”, are now presented by him as the means of preventing such an outcome.

The central bank monetary policy statement language has also changed. It now opens the door to further core interest rates cuts in the near future. 

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