THE Reserve Bank was more inclined to cut interest rates at its board meeting earlier in February because of uncertainty surrounding the global economy.
Companies are already delaying their investment decisions as they wait to see how a looming trade war between the United States and China plays out, the central bank’s deputy governor Andrew Hauser told a Senate estimates hearing at Parliament House last week.
That freezing effect of uncertainty had the potential to lower economic output and was a factor weighing in favour of the board’s decision to cut the cash rate by 25 basis points.
“Companies are slowly waking up to the possibility that if things remain as uncertain as they currently are – that perhaps they’ll just delay their investment projects or delay their new external market developments – just to see how things pan out,” Mr Hauser said.
“Whilst things remain uncertain, cutting rates and easing monetary policy a little in response seemed to us – some of us – sensible.”
The RBA’s cut came after its preferred inflation gauge – the trimmed mean – fell to 3.2 per cent in the December quarter.
But Governor Michele Bullock, who missed the Senate grilling because she was attending the G20 Summit in South Africa, said the board was cautious about the prospect for more cuts and would need to be guided by further inflation data.
The first inflation print since the rate cut showed the trimmed mean – which excludes some volatile items – rose 0.1 percentage points in January, the Australian Bureau of Statistics reported last Wednesday.
While the monthly figure is prone to bounce around more and plays a lesser role in the board’s decision-
making, a continued slowdown in housing costs augurs well for March quarter data, available on April 30.
“The cost of new dwellings and rent are both key components of the index, and both of those have moderated, particularly in the most recent quarter, actually quite substantially and welcomely,” Mr Hauser said.
Pushing housing costs down was a combination of higher interests rates, labour shortages easing and costs for inputs like construction materials coming down.
Softer housing inflation and a re-weighting of the CPI basket to assign lesser importance to electricity prices should cause the trimmed mean for the quarter to come in 10 basis points below the RBA’s forecasts, CBA senior economist Stephen Wu said.
That should pave the way for another 25 basis point cut at its May board meeting, he said.
While growth in new dwelling prices has reached its lowest point in four years, according to the ABS release, the challenge for first home buyers to crack into the housing market is still as hard as its been.
The price of an average entry-level house in Australia grew by more than 50 per cent over the past five years, Domain’s First Home Buyer report revealed.
It now takes a median first home buyer four years and 10 months to save up a 20 per cent deposit for an average entry-level house worth $617,000.
