RBA cuts interest rate to 1.25%

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The Reserve Bank of Australia (RBA) on Tuesday lowered the cash rate by 25 basis points to 1.25% to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

The move marks the first change to the rate after almost three years of keeping it at 1.50%. The central bank said it expects the 0.25% cut to help boost subdued inflation, as well as reduce the unemployment rate, which had been steady at around 5% for some months but ticked up to 5.2% in April.

The bank hinted that it could ease monetary policy again to support growth, unemployment, and drive inflation towards its 2%-3% target rate.

“The board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time,” said RBA Governor Philip Lowe.

Some industry groups deemed the slash in the official interest rate a significant step to stabilise the housing market and affordability for buyers.

“…This cut will stabilise the market, which is already showing signs that the rate of price falls is declining rapidly,” said REIA President Adrian Kelly.

The cut will act as a spur to improve lending, lift consumer confidence, and get the housing market moving again, according to the Urban Development Institute of Australia (UDIA).

“The rate cut represents the latest act in a suite of proactive measures to improve access to credit and re-energise economic activity,” UDIA National President Darren Cooper said. “Coupled with the Australian Prudential Regulation Authority’s (APRA) recent decision to ease serviceability benchmarks and the Australian government’s future endeavours to close the deposit gap, we’ve now got an agenda firmly geared towards growth.”

Housing construction has been dropping for over a year, and approvals for detached dwellings are at a six-year low.

“Housing construction is crucial to Australia’s broader economic and employment fortunes – and without an improvement in sales activity and an impetus for new projects to commence and existing projects to expand, the gap between supply and demand will quickly feed into increased prices once again,” Cooper said.

 

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