Low interest rates reviving key industries, says Reserve
As markets debate whether interest rates have bottomed, deputy governor Philip Lowe said on Tuesday that lowering the cash rate to 3 per cent had boosted high-employing sectors including house building and retail.
But while Dr Lowe painted a picture of an improving domestic economy, he expressed grave concerns about the Cyprus government's plan for a tax on bank deposits, warning it increased the risk of bank runs.
The RBA has slashed the cash rate by 1.75 percentage points since late 2011, and economists are divided on whether its cutting cycle is over. While the Reserve has said it is ready to lower the cash rate further if needed, Dr Lowe said, lower borrowing costs had already contributed to a 4 per cent rise in house prices in the past year and the 20 per cent growth in share prices. He rejected claims lower rates were ineffective, saying there were "tentative" signs of improvement in retail and housing construction. "Equity prices are up over 20 per cent since the middle of last year," Dr Lowe said in Sydney. "Households do appear to be feeling better about both their finances as well as Australia's medium-term prospects."
Despite the latest bout of concerns over Europe, financial markets have sharply scaled back their expectations of rate cuts this year.
HSBC chief economist Paul Bloxham predicted the RBA would make no new cuts because housing activity was already responding to cheaper debt and officials would be wary of fuelling a housing bubble.
In board minutes published on Tuesday, the RBA predicted easing in the fierce competition for deposits, which banks have blamed for their failure to fully pass on official rate cuts.
Frequently Asked Questions about this Article…
The Reserve Bank says record low interest rates and a cash rate lowered to 3% have reignited high‑employing sectors such as house building and retail, with tentative signs of improvement in housing construction and retail activity.
According to deputy governor Philip Lowe, high‑employing sectors including house building and retail have been boosted by lower borrowing costs, and these are the industries the RBA expects to pick up slack as resources investment eases.
The RBA says lower borrowing costs contributed to about a 4% rise in house prices over the past year and roughly 20% growth in equity (share) prices since the middle of last year.
Economists are divided: the RBA has said it stands ready to lower the cash rate further if needed, but markets have scaled back expectations of cuts and HSBC chief economist Paul Bloxham predicted the RBA would make no new cuts because housing is already responding to cheaper debt.
Deputy governor Philip Lowe expressed grave concerns that the Cyprus government's plan for a tax on bank deposits could increase the risk of bank runs, warning it was a serious issue for financial stability.
Board minutes published by the RBA noted fierce competition for deposits had been easing; banks have blamed that competition (and its subsequent easing) for their failure to fully pass on official rate cuts to deposit customers.
HSBC's Paul Bloxham warned officials would be wary of fuelling a housing bubble, and this concern is part of the argument for why further RBA cuts may not be pursued despite lower borrowing costs.
Based on the RBA's remarks, investors may want to watch housing activity and retail conditions (which have shown tentative improvement), movements in share prices (which rose about 20% since mid‑last year), and any policy signals from the RBA about the cash rate or financial stability risks such as bank deposit measures overseas.
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