The Reserve Bank of Australia (RBA) has made a bold move by officially reducing the interest rates by 25 basis points from 1.5% to 1.25%. This widely anticipated reduction comes after RBAs signal that it may cut interest rates in order to combat a rise in unemployment.

According to RBA governor Philip Lowe, the board decided to support employment growth and reaffirm confidence in the inflation rate which is said to be on par with the medium-term target. He also noted that the inflation outcomes have been lower than expected which would suggest a subdued inflationary pressure on the economy.

Influence on Property Market

The 25-point decrease has also influenced the property market where lower rates in conjunction with other regulatory measures will lend support to Australia’s slowing residential market.

Marcel Thieliant, a senior economist at Capital Economics, believes that the RBA’s rate cutting cycle likely heralds the end of the housing downturn. “We now expect house prices to start rising from early next year. But the prospect of rising house prices doesn’t mean that the RBA is done easing. The RBA has lowered interest rates even when house prices were already rising following seven out of the last eight housing downturns.”

On the other hand, Corelogic’s Tim Lawless expressed that the housing market is likely to see an improvement following the federal election, lower mortgage rates, and APRA’s pledge to deliver lower serviceability assessments. “However, with credit policies remaining tight, the stimulus of lower rates isn’t likely to be as effective in kick starting the housing market as what we have seen in the past,” Lawless said.

Recent housing data released by Corelogic suggests that the pace of decline has eased for the month of May with major capital city markets such as Sydney and Melbourne experiencing the smallest rate of decline since March of last year.

What can we expect in the future?

Finally, AMP Capital’s Shane Oliver stated that “Rate cuts are a bit like cockroaches, if you see one there is normally another nearby. We expect another 0.25 per cent rate cut in July or August and two more rate cuts by mid next year taking the cash rate to 0.5 per cent.”

Source: The Urban Developer