As widely expected, the Reserve Bank of Australia (RBA) did not cut the cash rate in December 2019 – nor would it have been a cause for celebration if they did.
The cash rate is currently historically low at 0.75%, following three rate cuts in June, July and October this year, and so far the economic response to shaving three-quarters of a percent off interest rates in just five months has been subdued, at best.
Following a reasonably volatile 12 months in terms of property price movements and consumer access to mortgage funding, some sectors of the housing market appear to be responding to an environment of lower interest rates, particularly in Sydney and Melbourne.
In fact, new data from the November CoreLogic Home Value Index data released Monday December 2 highlights the continued, somewhat surprising rebound in residential property price growth in Sydney and Melbourne, with the price index up around 8% in both cities since June 2019.
It’s important to note that sales volumes are still down, and this median price ‘growth’ may be driven in part by more higher-value transactions, as APRA’s lifting of the serviceability cap has increased borrowers’ access to finance this year.
Nonetheless, most economists and analysts expect this growth to slow over the new year. Many also believe that in spite of RBA governor Philip Lowe insisting that the federal bank had “no appetite” for quantitative easing (QE), it could be on the cards next year. QE is a process whereby the central bank creates new cash to decrease or ‘ease’ the cost of borrowing, through a process that involves purchasing government bonds or other securities from the market in order to increase the money supply. This encourages lending and investment, and injects liquidity directly into the economy.
Looking ahead, if rebounding property prices fail to translate into increased consumer confidence and therefore, rising consumer spending and a growing appetite for investing, then we may see another interest rate cut in February or March 2020.
The case for an interest rate cut in February will depend on housing, construction and economic data released over the next two months. If consumers are buoyed by recent interest rate cuts and this translates to big Christmas spending, it may form part of a fiscal stimulus that gets the economy moving. However, if consumer spending fails to alleviate the Reserve Bank’s pressure to drive the inflation rate up, this could give them cause to reduce the cash rate further next year.