Though many in the industry were hoping for a larger cut, today’s 25 basis point cut in official interest rates will provide some form of further relief to the nation’s struggling property and construction industry.
Coming on top of a 50 basis point cut in May, the Reserve Bank of Australia (RBA) today announced a further 25 basis point cut in official interest rates from 3.75% to 3.50%.
Although growth in the world economy had picked up in the early months of this year, the bank says, recent indicators suggest a weakening in Europe and further moderation of growth in China.
In Australia, the bank says available indicators suggest modest growth and a degree of precautionary behaviour on the part of households and businesses.
“At today’s meeting, the Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy” the bank says in a statement.
Not surprisingly, the bank’s move has been welcomed by the construction industry. Master Builders Australia says the industry is looking for today’s rate cut to provide a ‘floor’ under falling levels of consumer confidence. Housing Industry Association, meanwhile, says that the RBA deserves a ‘policy tick of approval’ for today’s call.
“Today’s rate cut sends a clear signal that the Reserve Bank is serious about two things: insulating the Australian economy from volatility in the world economy; and improving confidence and activity in the domestic economy” HIA Senior Economist Andrew Harvey says.
So will this lift the nation’s building and housing sector out of its current slump? Good question.
Certainly, recent home sales and building approval data suggest that the pace at which new residential work is coming in is slower than it has been at pretty much any other time in recent years, meaning that weak conditions are likely to persist notwithstanding the combined impact of today’s decision and the earlier interest rate cut in May.
Furthermore, the market will certainly not be helped by the winding up of homeowner incentive schemes in Queensland and Victoria.
Moreover, how much impact today’s decision will actually have will depend on how much of today’s rate cut will actually be passed on by the banks. In that context, it is hardly surprising that the housing industry has joined politicians, unions, business lobby groups and others in insisting that the full 25 basis point cut to be passed on to consumers.
Banks, HIA’s Harvey says, have a ‘social obligation’ to pass on the full extent of the cuts.
That said, by reducing borrowing costs, the combination of today’s move and the previous 50 basis point cut in May have created a borrowing cost environment which is more conducive to higher levels of consumer demand than would otherwise be the case.
Make no mistake, residential construction conditions in Australia are set to remain tough.
But today’s decision is a welcome outcome for the sector.