In light of the alarming building data which has come out over the past month, a decision by the Reserve Bank of Australia today to cut official interest rates by 50 basis points is set to provide a welcome reprieve for the building and construction industry.
In its monthly board meeting on Tuesday, the Reserve Bank of Australia (RBA) cut official interest rates in Australia by 50 basis points to 3.75%.
In a statement, the RBA says its decision was prompted by persistently weaker than expected data surrounding the economy over the past month as well as inflation data which was more moderate than expected.
“Since it last changed the cash rate in December, the Board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand” the bank’s statement says.
“The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction”.
“In considering the appropriate size of adjustment to the cash rate at today’s meeting, the Board judged it desirable that financial conditions now be easier than those which had prevailed in December. A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates”.
Desperately Needed and Welcomed
For the building and construction sector, the anticipated boost from today’s decision could not come at a more important time. Data out as recently as Monday showed new home sales plummeting to ten year lows (with falls across all states). Earlier in April, ABS data had shown a 7.8% drop in residential building approvals to levels not seen since May 2009.
Moreover, the news comes amid even more signs of a troubled housing sector. Data out on Tuesday from the Australian Bureau of Statistics (ABS) showed that average house prices across the eight capital cities in Australia fell by 1.1% in the March quarter and were down 4.5% on the same quarter twelve months earlier.
Not surprisingly, building and industry groups have responded with a sense of elation to the bank’s decision.
“Today’s decision is a decisive move which will help confidence and activity in residential construction and the wider domestic economy” says Housing Industry Association Chief Economist Harley Dale.
“The immediate attention now of Australian businesses and households will be on the banks.
“It is drawing a long bow to use bank funding costs as an excuse for not passing on today’s RBA interest rate cut in full to both Australian businesses and households. Anything less than a 100 per cent pass-through will further dilute the effectiveness of monetary policy and damage confidence in this important policy lever”.
Wilhelm Harnisch, Chief Executive Officer of Master Builders Australia, has expressed similar sentiments.
“Today’s decision has the potential to act as an important psychological circuit breaker required to boost confidence and rekindle home buyer interest”.
“The banks must play their part by fully passing on the reduction in official rates thereby ensuring today’s decision has a meaningful effect on a clearly struggling building industry”.
“Lower interest rates are needed to drive a private sector recovery, particularly in housing and commercial building sectors that are currently facing weak trading conditions”.