On the big budget day, RBA keeps interest rates at record low
- Posted By Pasang Sherpa
The Reserve Bank of Australia has left the official cash rate on hold at 0.25 percent as the nation prepares for what the federal government is calling the most critical budget since the end of World War II.
Tuesday's decision comes amid growing uncertainty about the prospect of a further cut after the RBA indicated that further cuts may be on the horizon.
In a statement Tuesday, RBA Governor Phillip Lowe said: “The Australian economy experienced a sharp contraction in the June quarter, with output falling by 7%. As difficult as this was, the decline in output was smaller than in most other countries and smaller than was earlier expected.
“A recovery is now under way in most of Australia, although the second-wave outbreak in Victoria has resulted in a further contraction in output there,” Mr Low said in the statement.
“The national recovery is likely to be bumpy and uneven and it will be some time before the level of output returns to its end 2019 level.”
Mr Lowe said the Board will continue to consider how further quantitative easing could boost employment as the economy begins to loosen up, suggesting a reduction in the immediate future.
The federal budget is the 'main game in town'
The Board's decision coincides with the presentation of the 2020-21 federal budget on Tuesday.
Treasurer Josh Frydenberg is set to announce an ambitious large-scale spending budget, including a major upgrade to infrastructure, the expansion of the First Home Loan Deposit Program and the implementation of personal income tax cuts.
Realestate.com.au's Executive Director of Economic Forecasting Cameron Kusher said it's obvious that the federal budget is the "main game in town" this month, but a cut in interest rates could be on the cards in November.
“Many are predicting a 10-15 basis point cut in rates next month or shortly thereafter,” Mr Kusher said.
“With fiscal policy starting to kick in and government spending ramping up, I feel like the RBA would be better placed waiting for a bit longer,” he added.
“If anything, as support measures such as JobKeeper, JobSeeker, HomeBuilder and loan holiday periods come to an end, it is likely, in my view, that the RBA may need to intervene and provide further monetary policy stimulus.”
The RBA is waiting to review the budget
Sam Boer, CEO of Smartline Mortgage Broker Company, said that the decision to keep the cash rate in October indicates that the RBA would like to analyse the budget in depth before taking any further steps.
“I’m not surprised the cash rate will remain at 0.25% for at least another month. The federal budget is yet to be announced and the RBA needs to know where the $25 billion in extra government funding will go before it can make a decision on rates,” Mr Boer said.
“It will be interesting to see what happens next month as the economy remains sluggish. Rising government debt from the huge range of stimulus measures put in place to help Australians through COVID means the RBA may need to step in with another rate cut to continue to stimulate businesses, jobs and consumer spending.”
Is this the good time to buy property?
According to the expert survey of Finder, 65 percent of economists who weighed in on this subject said that now is a decent time to buy homes, with new ABS statistics showing a $1.2 billion rise in owner-occupier sales between June and July 2020.
Almost 90 % of respondents believed that the housing sector is displaying more strength than expected, amid increasing unemployment, JobSeeker cuts and the Victorian lockout.
Rebecca Cassells of Bankwest Curtin Economics Center said that government stimulus initiatives since the pandemic have effectively bolstered the property market.
“The current resilience of the housing market is related to the stimulus that both federal and state governments are directing to the sector and not necessarily driven by current economic conditions,” Ms Cassells said.
Mr Kusher acknowledged that Australia's housing market is still being kept alive by record amounts of government stimulus, but the litmus test will arrive as soon as these aids begin to bleed.
“Property prices have remained buoyant so far during the pandemic, but once wage subsidies and loan holiday periods expire many mortgage holders, particularly investors, could be forced to sell up.
“A glut of rental properties in our bigger cities could push rental prices down, leading potentially to an influx of rental properties for sale.
“These effects could put downward pressure on property prices, however, it is likely to be contained to specific market places such as inner city units and lifestyle markets strongly reliant on overseas tourism.
“The record low interest rates and government stimulus present a good opportunity for house hunters in a secure financial position to break into the property market,” Mr Kusher added.
Source
McLean, S., 2020. realestate.com.au. [Online]
Available at: https://www.realestate.com.au/news/rba-holds-interest-rates-at-record-low-on-big-budget-day/