RBA Cuts Interest Rates, But Will It Help The Housing Market?

02/10/2012 6:46 am

 by Andrew Simon, Investment Analyst (Linkedin Profile), The opinions expressed in this post are my own and they do not represent those of the organisations that I am associated with.



The RBA cut interest rates today for the first time since June, in what the WSJ is calling a reaction to falls in commodity prices and mounting evidence that the sun has set on the mining boom.

The RBA surprised some of the "experts" by announcing a quarter-of-a-percentage-point cut of its benchmark lending rate to 3.25%. A rate that hasn't been seen since  2009, when the globe was in the middle of the GFC. The soaring currency also influenced the decision to cut rates. Interest rates have now been cut by 1.50 percentage points since November last year.

The decision to end a three-meeting pause was predicted by 9 of 28 economists surveyed by Bloomberg News, while the rest forecast no change. Despite most experts predicting no change this month, most market economists expect rates to come down by the end of the year. The cut was on the RBA's negative view on the global economy, including the continuing European crisis, US fiscal uncertainty and Chinese growth concerns.

The RBA adopted a cautious tone over the recent drop in the terms of trade, stating that national income would decline as a result. Some economists are predicting that this is the start of a larger cutting cycle. The high AUD is considered a key concern for the the RBA, although it has not been explicitly stated by the RBA as a target.

The ability of the rate cut to benefit the housing market really depends on the efficacy of the monetary transmission mechanisms. Whether or not the increased liquidity can actually find its way to the people who can use it to purchase property is the key factor. This in turn depends on the willingness of banks to lend and the demand for financing. Both factors remain subdued at this time and unfortunately monetary policy cannot do much to change this.

Fore more check out the Statement by Glenn Stevens, Governor: Monetary Policy Decision