The Reserve Bank of Australia has cut interest rates to a fresh record low of 1.5 per cent to try and stimulate an economy that is suffering its slowest rate of price growth in 17 years.
In its decision on Tuesday, the central bank said slower growth in mortgage lending and house prices as well as an increasing supply of apartments provided it with scope to combat “quite low” inflation.
“The likelihood of lower rates exacerbating risks in the housing market has diminished,” said Glenn Stevens, RBA governor.
The 25 basis points cut in interest rates, which was predicted by four out of five economists, prompted a sell-off in the Australian dollar, which dropped as much as 0.6 per cent to below 75 cents to the greenback following the decision. But it had recovered to be 0.2 per cent higher at $ 0.7548 in early European trading.
The cut follows a surprising fall in headline inflation, which at 1 per cent is below the RBA’s target band of between 2 and 3 per cent.
Australia has enjoyed 25-years of recession-free growth, but now faces the challenge posed by the end of a mining investment boom and falls in commodity prices.
A surge in the volume of resource exports has pushed gross domestic product to grow at an annualised rate of 3.1 per cent yet wage growth is flat, income per capita is falling and business investment remains weak.
The RBA has progressively cut interest rates over the past three years — most recently in May — to help the economy shift from mining to services-led growth. This has been helped by weakening the Australian dollar, which has boosted exports and tourism.
But the fall in borrowing costs has caused a rapid increase in housing costs, with property prices in Sydney surging 90 per cent since the financial crisis.
Mr Stevens said low interest rates were helping Australia to make the necessary economic adjustments but warned an appreciation in the currency could complicate this process. He said inflation remains low and would remain so for some time due to subdued growth in labour costs and low cost pressures elsewhere in the world.
The RBA statement reveals the bank is less concerned about the pace of house price growth, which last year prompted regulators to impose limits on lending to investors.
Bill Evans, Westpac economist, said private data indicating that the RBA’s 0.25 per cent interest rate cut in May caused a spike in house prices had generated a fertile debate over whether a fresh cut would be appropriate.
“We can conclude … that the [central] bank sees limited risk from the rate cut to a resurgence in house prices,” he said.
Data published by Corelogic this week showed house prices increased 9.1 per cent in Sydney and 7.5 per cent in Melbourne over the past year. Prices in Perth, which has been hit hard by the mining downturn, fell 5.6 per cent in the same period.