What Does a Change in Interest Rates Tell Us?

Posted by Daniel Joseph

Driven by mounting economic uncertainty, the board of Australia’s Central Bank, the Reserve Bank, cut the cash rate to a historical low of 2.5 per cent when it met on the first Tuesday of August.

Generally speaking, the Reserve cuts the cash rate in an attempt to stimulate spending, which in turn buoys economic activity. However, one cannot draw a blanket conclusion on the state of every facet of the economy when there is a change in rates. Indeed, one sector of the economy may be performing well while another lags. After the meeting in August, the Reserve released a statement in which it asserted that the housing market is one of the bright spots in an economy that continues to perform ‘below trend’.

The economy is now expected to grow by 2.25 per cent this year, down 0.5 percentage points on an earlier May forecast. Growth is expected to pick up to 2.5 per cent for the 2013/14 financial year. But ‘in contrast’, the RBA said that ‘conditions in the housing market continue to improve’

Dwelling prices increased further in recent months, and auction clearance rates have remained high. Sydney’s auction clearance rate for the weekend beginning 4 August was 81.3 per cent – the fourth consecutive week clearance rates breached 80 per cent. This has been accompanied by an increase in housing loan approvals in response to low interest rates. The number of approvals in June rose 2.7 per cent according to the Australian Bureau of Statistics.

These factors, coupled with strong population growth (Australia’s population grew by 1.8 per cent during 2012 – the highest growth rate since 2009 according to ABS figures), point to a continued rise in dwelling investment in the period ahead.

Posted by Daniel Joseph, on 20th Sep 2013