Low rates still crucial for recovery

By Gerv Tacadena | 05 Aug 2020

The housing market continues to benefit from the low interest-rate environment, but some headwinds could test the effectiveness of the current monetary policy, says an expert.

In its monetary policy meeting this month, the Reserve Bank of Australia decided to maintain the cash rate at its historic low of 0.25%. The current cash rate target has already been described by the central bank as the "effective lower bound". This means that the RBA does not think any further reduction in the cash rate would be beneficial for the economy.

Eliza Owen, head of residential research at CoreLogic, said the RBA is employing a three-pronged approach to battle the impacts of the COVID-19 outbreak. Aside from maintaining the cash rate, the central bank is providing a term funding facility for banks to maintain liquidity. Another measure is the purchase of government bonds in the secondary market to reduce the cost of government debt, and put cash back into the hands of investors.

"For banking, finance and housing, the effect of this three-pronged approach has seen some obvious benefit. As the cash rate reduction flows through to mortgage rate discounts, mortgage holders are lowering their housing costs through refinancing," Owen said.

Also read: Low Interest Rates Likely To Persist

In fact, the average lending for new owner-occupier mortgages already fell to just 2.93% in May, down by 33 basis points since the start of the year. The cheap cost of mortgages, as well as government assistance and support schemes, will help boost activity among buyers, Owen said.

"Record-low mortgage rates should support some purchasing decisions, especially when combined with initiatives such as the HomeBuilder scheme, the First Home Owner Grant, and various other demand-side stimulus from state and territory governments," she said.

However, several challenges could impact the effectiveness of the RBA’s monetary measures. Owen said these factors include the low inflation, the unemployment rate, and the possibility of future lockdowns should cases of COVID-19 spike.

The latest consumer price index showed a 0.3% annual decline during the June quarter while the unemployment rate has risen to 7.4%.

"Considering the cash rate isn't likely to be reduced below its current setting, fiscal policies will be key to supporting economic activity through the pandemic," she said.

RBA Governor Philip Lowe said the Australian economy is going through a "very difficult period" as it experiences the most significant contraction since the 1930s.

"As difficult as this is, the downturn is not as severe as earlier expected, and a recovery is now underway in most of Australia," he said. "This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy."

Lowe believes that containing the outbreak will provide significant support and improve the confidence amongst households and businesses.

"The Australian government's recent announcement that various income support measures will be extended is a welcome development and will support aggregate demand. It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market," he said.

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