December 13 Australian Interest Rate Review

Recent interest rate cuts designed to depreciate the Aussie dollar might be under threat with fears of over-stimulating the housing market.

The Reserve Bank has kept rates on hold this December.

The December 13 decision accompanies commentary that (globally) “financial conditions remain very accommodative” and that Australia’s economy although tracking a little below trend, is experiencing well contained inflation and employment conditions. The Bank also notes there is an increased demand for finance by households and “continuing evidence of a shift in saver’s behaviour in response to declining returns on low-risk assets” (i.e. money getting out of the bank and into property and shares..!)
Consistent with its most recently published Board minutes the Bank is definitely adopting a neutral approach, observing that previous rate cuts were now having the desired effect.
The bank concluded in November the Aussie dollar was now 10% below its peaks. We might conclude that “between-the-lines”, the Bank is relieved the Australian dollar has trended downwards since its surprise rate cut in May this year. At that time the dollar hovered around 1.02 USD.
In May the Reserve bank’s focus shifted to influencing Australia’s exchange rate, despite quite reasonable local economic conditions. When the Board further cut rates in August, we can conclude the Bank felt comfortable doing so given the reasonably low inflationary outlook that continued since May, and so the bank was able to focus on Australia’s exchange rate and cut rates again.
Recent housing market indicators however point to rising house prices. It is true that Sydney median house prices have risen 12% over the last year, whilst median house prices across Australia have risen 8% overall.
The Aussie dollar has moved from USD 1.02 before the rate cut in May, down to approximately 91 US cents today, suggesting that perhaps the Reserve Bank strategy has worked! But with the reserve bank cash rate at a historically low 2.5% there does not seem like much room to continue this exchange-rate game.
Home loan rates in Australia range from 4.8 to 5.3% variable and 4.79-5.1% for 2 and 3 year fixed rates.

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