The Reserve Bank of Australia lowered its interest rate by 25 basis points effective August 3rd 2016. In arriving at the decision to lower the interest rate, the RBA cited slower than expected growth rate for major economies across the globe. In addition, economic dynamics in China were highly quoted as a major reference in the monetary policy decision. The bank also indicated a probability of further cuts in interest rate between now and December 2016.
Housing market fears
According to the quarterly Statement on Monetary Policy released by the bank, the housing market in the country also played a major role in the guiding the RBA in arriving at the decision to lower the interest rate. "The board had taken careful account of developments in the housing market, noting the effects of supervisory measures to strengthen lending standards, the easing in housing credit growth and the abatement of strong price pressures," the statement noted in part.
Australia’s economy is highly dependent on the export of commodities and China is a big trade partner and export destination for Australia. As China’s economy slows down due to the transition it is currently undergoing, Australia’s exports to China will suffer in the meantime. According to the Reserve Bank of Australia, the property market would end up being hard hit by the cooling off of the Chinese economy. In a statement, the RBA said that, "A substantial slowing in demand in the Chinese property market would pose risks for property developers and related industries, including the steel industry."
Large Chinese developers are currently on site in Australia developing residential and commercial properties. There has been a boom in the residential property market resulting to a fall in the number of residential floor spaces sold. With forecasted slow growth in demand, a collapse of the sector would lead to huge losses to the individuals and businesses that had pre-purchased those properties. The local contractors building the properties would also be hit hard as well as the banks financing those projects recorded high financial losses from non-performing loans.
Inflation within RBA range
The RBA however maintained its outlook on the economic growth in Australia in the near term. The bank said that inflation is likely to remain below 2% over the forecast period until 2018. This is within the target inflation rate range for the RBA in the long run of between 2% to 3% and hence showing a positive outlook.
With the slow pace of economic progress in Australia and considering other negative global economic factors affecting Australia directly, the bank noted that its lowered interest rate would not trigger an increase in inflation due to rising consumer demand. A fall in investment in the mining sector, high competition in the retail sector and record low growth in wages were quoted by the bank as contributing to generation of disinflationary pressures within the economy; hence keeping the inflation in check too. In addition, analysts at iForex, an online trading platform noted that “Australia’s economy is highly dependent on commodity exports and with the commodity prices cooling off; the reserve bank had to stimulate economic growth through loosening its monetary policy to allow more money into circulation within the economy and create a consumption driven economic growth.”
The Reserve Bank of Australia also maintained its economic growth for Australia mainly unchanged at between 2.5% to 3.5% growth rates this year; and then rising to 4% to 5% by 2018. The bank however said that, even though the economic growth prospects were positive, there was more room for even higher growth if the right economic measures are put in place today.
Bank of England lowered rates
The Bank of England also lowered its interest rate for the first time in 7 years to 0.25% from 0.5%. The move was also based on the expected slow growth of the UK economy following its exit from the European Union. Just like in Australia, the BOE expects that the lower rates among other expansionary monetary policies will result to increased consumption which will stimulate increased production and in the end boost GDP of the country. Whether loosening the monetary policies will result in actual economic growth in Australia and the UK is yet to be known, but considering the prevailing economic conditions both central banks might be headed in the right direction.
