It was a widely expected decision after a recent run of soft inflation readings.
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The RBA last cut its overnight cash rate target in May, taking it to 1.75 per cent, following weak consumer price data in the March quarter.
The currency is “a little overvalued” when compared with factors such as commodity prices and terms of trade, Andrew Ticehurst, a rate strategist at Nomura Australia, told CNBC’s “Capital Connection” after the RBA decision was announced.
Following recent significant volatility, the sharemarket has steadied and is showing signs of a consistent recovery. One important reason behind the lack of inflation in recent years has been weak income growth, which has likely weighed on spending and therefore inflation. “The futures market is looking confident we’ll get a bounce, so that should give kiwi a bit of a bounce also”. To be specific, in response to the GFC, which clearly threatened to tip at least the developed world quickly into deep recession, they lowered our rates slowly, and by significantly less than did most other developed economies – from their pre-GFC peak of 7.25 per cent in August 2008 to about 3 per cent in April 2009.
The Kiwi surged against its major pairs as expectations for a rate cut grew, and it was last 0.49% stronger against the greenback at NZD 1.3874.
‘As we see the RBA’s inflation forecasts on Friday, they will still show inflation remaining extremely low and keep alive the prospect of another rate cut later this year, ‘ he told AAP.
Low interest rates supported domestic demand and the lower exchange rate since 2013 has helped the traded sector.
“A resurgence of growth could trigger a new round of regulation from the Australian Prudential Regulation Authority aimed at limiting growth in investment lending and/or tightening loan to valuation ratio requirements for lenders”.
“Given the subdued growth in labour costs and very low-priced pressures elsewhere in the world, this is expected to remain the case for some time”, he says. “The four major domestic factors are the Australian worldwide June trade figures (Tuesday), the RBA’s August board meeting (Tuesday), the Australian June retail trade numbers (Thursday) and the RBA’s Quarterly Statement on Monetary Policy (Friday)”.
CoreLogic’s head of research Tim Lawless said a slight slowdown in overall property values over the past 12 months would have made it easier for the Reserve to cut rates.
All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.
Indeed, Australia’s low inflation was a talking point in the RBA’s commentary. Economists had largely predicted Tuesday’s cut.
St George senior economist Janu Chan said the real question was what difference rate cuts would make in the current economic environment.
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For us the real issue will be the environment in 2017 when the housing cycle will be in reverse; jobs growth may have cooled; global growth, particularly in this region, will have slowed further; and Australia’s interest rates may still be attractive to worldwide investors.
