Low rates reviving key industries, says RBA
As markets debate whether interest rates have hit their trough, RBA deputy governor Philip Lowe said on Tuesday lowering the cash rate to 3 per cent had given a boost to high-employing sectors, including housing construction and retail.
But while Dr Lowe painted a picture of an improving domestic economy, he also expressed grave concerns about the Cypriot 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 need be, Dr Lowe said the reduction in borrowing costs had already contributed to a 4 per cent rise in house prices in the past year and the 20 per cent annual growth in share prices.
He rejected claims that lower rates were ineffective, saying there were "tentative" signs of improvement in retail and housing construction, and the evidence suggested "lower interest rates are doing their work broadly as expected".
"Equity prices are up over 20 per cent since the middle of last year. And the level of consumer confidence is now well above its long-run average level," Dr Lowe said. "Despite what one often hears, households do appear to be feeling better about both their finances as well as Australia's medium-term prospects."
On the Cyprus government's plan to tax bank deposits, Dr Lowe said he had been "very, very surprised" by the policy to impose a "haircut" on small depositors.
The deputy governor said the move threatened to undermine confidence that money held in banks was secure.
"It could make the system more susceptible to bank runs," Dr Lowe said. "That's something that the authorities in Europe will have to watch very carefully."
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The Reserve Bank of Australia (RBA) says record low interest rates are beginning to reignite activity in high-employing sectors. Deputy Governor Philip Lowe highlighted tentative signs of improvement in housing construction and retail, and said lower borrowing costs are broadly doing their work as expected.
According to RBA deputy governor Philip Lowe, housing construction and the retail sector have received a notable boost from the reduction in the cash rate, with those industries showing early signs of picking up as resources investment cools.
The RBA reported that lowering the cash rate to 3% contributed to about a 4% rise in house prices over the past year and that equity/share prices have experienced roughly 20% annual growth since the middle of last year.
The article notes economists are divided on whether the RBA’s cutting cycle is over. The RBA has cut the cash rate by 1.75 percentage points since late 2011 and said it stands ready to lower the cash rate further if needed.
Philip Lowe said consumer confidence is now well above its long-run average and that households appear to be feeling better about both their personal finances and Australia’s medium-term prospects, which the RBA links to the lower interest-rate environment.
Deputy Governor Lowe said he was very surprised by Cyprus’s proposal to impose a ‘haircut’ on small depositors. He warned the policy could undermine confidence in the safety of bank deposits and increase the risk of bank runs, a concern European authorities will need to monitor closely.
The RBA warned that policies like taxing or imposing haircuts on bank deposits can undermine trust that money held in banks is secure, which in turn could make the banking system more susceptible to runs — a systemic risk authorities should watch carefully.
The RBA’s comments suggest lower interest rates are supporting housing, retail and equity markets and boosting consumer confidence. At the same time, investors should note the RBA remains prepared to cut further if needed and that external shocks — such as policy moves affecting bank deposits in other countries — can pose confidence risks to financial systems.
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