How Low Will Interest Rates Go?

Following this month’s meeting, the Reserve Bank of Australia decided to keep interest rates at the record low level of 1.75 percent.

Last month, the RBA decided to slash the cash rate by 25 basis points. Now, the reserve wants to give the Australian economy more time to absorb the rate cut.

According to CoreLogic RP Data head of research Tim Lawless, the RBA is facing difficult decisions due to the current economy.

He stated, “In making their decision the RBA is facing conflicting economic trends. On one hand, we have an economy that is growing at just over 3 percent per annum, low unemployment and a re-accelerating housing market. On the other hand, the RBA is confronted with a core inflation reading that is at a record low as well as the lowest wage growth on record.”

Will Rates Be Cut Again?

It seems entirely likely that the interest rate may be cut later on.

The latest GDP figures show the highest quarterly result since before the crash in 2008. This allows the RBA a chance to hold off on another cash rate cut for the moment. If inflation figures remain unchanged, then there will most likely be a rate cut in August. Experts like Ratecity Money editor Sally Tindall expect at least one more rate cut in 2016.

Lower Rates Indicate a Concern for the Housing Market

The effects of the rate cut have not been felt yet because mortgage lenders have not adjusted their rates to the lower level.

According to REA Group chief economist Nerida Conisbee, “The move by the RBA to keep rates on hold suggests that they consider the house price rise to be more of a temporary recovery as opposed to a continual run in growth.”

In Sydney, the rising house prices following last month’s rate cut are unlikely to last.

House prices are a key concern of the Reserve Bank of Australia because they have a tendency to re-inflate the growth trend.

The banking sector and the RBA must keep a close eye on the market since it could cause the economy to overheat.

Part of the problem with the housing market is that there is a shortage of listings in some parts of the country.

When there are more buyers than sellers in the marketplace, prices naturally rise. While supply and demand are applying pressure on prices in metropolitan markets, regions like the NSW Central Coast are still feeling the heat.

In response to the real estate market situation, some sellers are hesitant to leave their homes. They are unwilling to sell their property until they are sure that they can find a new house to move into.

In essence, sellers feel like it may be too risky to buy a home unless they know that there are properties available for sale.

Property Values Make Gains

Recent results from CoreLogic RP Data indicate that capital city’s home values have increased by 1.6 percent in just the last month.

In the last year, there has been a gain of 10 percent in home values. Normally, this would indicate that the economy is growing and reduce the need for a rate cut.

Banking regulators are afraid that the real estate market is growing too quickly. If left unchecked, it could lead to a housing bubble like the United States faced in 2008.

To prevent this from happening, the RBA has kept interest rates at low levels to counter the rise in home values.

Tim Lawless at CoreLogic RP Data says that, “Strong housing market conditions probably wouldn’t be enough to block a further rate cut; however, if the renewed growth trend continues, there is the potential for a further regulatory response that could cool housing market demand while at the same time allowing monetary policy to stimulate the broader economy.”

Due to this, investors and home buyers can expect another rate cut by the end of 2016. If inflation figures continue to be low, then a rate cut may occur as early as August.