In a significant win
for building and engineering firms, the Reserve Bank of Australia has decided on a further cut in interest rates.
In its December meeting, the RBA board of directors decided to lower official interest rates by a further 25 basis points, or quarter of a percent, to 4.25%.
The move, which will lower the cost of borrowing and of servicing existing loans, provides much needed relief for the building and construction industry, which is already struggling as a result of weak building conditions.
Combined with the previous cut in November, the move will also help to stimulate demand for residential construction in early 2012 by encouraging first home buyers to enter the housing market.
In its statement, the bank said that a moderating inflation outlook had ‘afforded scope for a modest reduction in the cash rate’. It said that inflation is now starting to decline as agricultural production recovers from last summer’s ‘weather events’ and that outside of the resources sector, a softer labour market had reduced the chances of any blowout in wage costs.
It also said that growth in the global economy had moderated and that Asian economies were now starting to see some impact from the European crisis. In Australia, whilst mining and some service sectors were experiencing good growth, the bank says that ‘changed behaviour’ by households, along with the high exchange rate, had had a ‘dampening effect’ on other sectors.
Building industry groups have welcomed the decision, but say that the RBA should not rule out further cuts should the situation in Europe continue to deteriorate.
“Global uncertainty remains rife and the implications for the Australian economy unclear, so a further interest rate cut today was justified” says Housing Industry Association (HIA) Chief Economist, Dr Harley Dale.
“Today’s rate cut should provide further relief for a building industry clearly in the slow lane of the economy” says Master Builders Australia (MBA) chief executive officer Wilhelm Harnisch.
Both HIA and MBA are urging banks to pass on the full extent of the cuts to borrowers. Over the past month, Australian banks for reported significantly greater difficulty in raising money in overseas funding markets. There have been fears that as a result, banks may elect not to pass on the full extent of any reduction in official interest rates in order to maintain profit margins.
“There would be no justification for the banks to delay or withhold the reduction in the official cash rate announced by the RBA today” Harnisch says.
“Banks must mirror the cut in official rates thereby helping new home buyers as well as providing relief for existing homeowners and small businesses struggling with repayments.”
