The Strategist

Reserve Bank of Australia cuts rates hoping to support the country's economy

10/15/2019 - 10:41

The Reserve Bank of Australia (RBA) admitted a possibility of lowering rates. However, the bank is increasingly worried about the recent surge in housing prices in the country, which requires increased attention.

The RBA Board is “ready to soften monetary policy if necessary” to maintain economic growth and create jobs. On October 1, the RBA lowered its key rate to a record low - from 1% to 0.75%. This is the third rate cut this year.

At that, the RBA is increasingly worried that low rates could spur the rise in housing prices. The volume of housing lending remains small, and the RBA is closely monitoring the situation in the housing market.

As rates fell, housing prices began to rise, especially in Sydney and Melbourne. Prior to this, housing had been getting cheaper for two years.

The sharp rise in housing prices worries the RBA. Record household debts and years of weak wage growth may slow down the economy. A further decrease in the key rate will support the assumption that the RBA in 2020 will begin to take additional measures of monetary policy, in particular, to buy government bonds.

The RBA Board was considering the possibility of suspending rate cuts to combat future shocks for the economy, but ultimately rejected this idea. By lowering rates now, “the board can reduce the likelihood of a negative shock, which will lead to a significant deviation down from the bank’s targets, strengthening the position of the economy," the RBA concludes.

Australia's GDP grew in the II quarter by 1.4% in annual terms. This is the weakest growth since the global financial crisis of 2008-2009.