June 23, 2017 • 9:25 pm

Azzam Derbas

INTEREST RATES: It’s time for a cut.

INTEREST RATES:
IT’S TIME FOR A CUT
In response to the Global Financial Crisis the Reserve Bank of Australia (RBA) cut official interest rates by 4.25 percentage points from September 2008 and April 2009.

Since the cuts, monetary policy has been tightened with seven increases to November 2010 of 1.75 percentage points. The RBA has left official interest rates unchanged at its last eleven monthly meetings.

The RBA’s stance has been pre-emptive to curb inflationary risk and keep inflation within the 2-3 percent target range. The outlook for the Australian and global economies would suggest that the RBA has achieved its objective with regard to the Australian economy and inflationary pressures and that it is now time for a rate cut. The following factors support this conclusion:

“The RBA’s stance has been pre-emptive to curb inflationary risk…”

The RBA measures of underlying inflation have been within the target range since March 2010. Recent surveys show that inflationary expectations are falling; underlying inflation is expected to lie within the RBA target band.

• Uncertainty over the global outlook continues; uncertainties over sovereign debt failures over the Eurozone continue and are generating volatility in global financial markets. The International Monetary Fund (IMF) has recently downgraded its forecasts for growth.

• Recent labour force statistics point to a weakening labour market in Australia and these conditions are likely to last for a while. The latest ABS statistics show that the national unemployment rate increased to 5.3 per cent in August from 5.1 per cent in July and 5.0 per cent in June

• Forecasts for Australian GDP growth are being revised downward. The IMF has revised its forecast for real GDP growth in Australia to 1.8 per cent for 2011/12. This compares to actual growth of 1.9 per cent for 2010/11.

• Consumers are spending less and saving more. The impact of this is particularly acute for the retail sector where year on year trade figures for July show declines in clothing and footwear (-7.5 per cent), department stores (-2.2 per cent) and household goods (-0.3 per cent).

Since the RBA began tightening monetary policy the number of finance commitments has declined by 27 per cent. The impact has been most pronounced for first home buyers as shown in the graph to the right. During the last decade the proportion of all finance approvals to first home buyers has been both declining and extremely variable.

The downward trend was arrested in October 2008 with the introduction of the boost to the First Home Owners Grant and a drop in interest rates.

In June 2009, 27.9 percent of all finance approvals were to first home buyers. The latest available data, for August 2011, has the percentage of first home buyers at 15.3 per cent. This is well down on the average since July 1991 of 20.1 per cent. Whilst the reasons for this drop are manifold and cannot be attributed to a single factor, the part played by interest rates is crucial. When official interest rates go up the proportion of first home buyers declines and vice versa.

All the economic indicators point to the RBA reducing interest rates.
“Uncertainty over the global outlook continues…”
This article is brought to you by REIA Manager Policy, Jock Kreitals.

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