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RBA open to further rate cuts despite Sydney housing boom

RBA open to further rate cuts despite Sydney housing boom

Reserve Bank deliberations suggest another interest rate cut may be coming in the months ahead.

Board members made a clear decision at the monthly meeting on 5 May to leave the door open to future rate cuts, according to the minutes, which were released earlier this week.

The Reserve Bank cut the official cash rate by 25 basis points in February and then by the same amount in May, bringing the official cash rate down to two per cent.

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“Members agreed that, as at the time of the reduction in the cash rate in February, the statement communicating the decision would not contain any guidance on the future path of monetary policy,” the minutes revealed.

“Members did not see this as limiting the board's scope for any action that might be appropriate at future meetings.”

One thing the minutes make clear is that the board had already decided ahead of this month’s meeting that it had to cut rates – the only question was whether to do so in May or June.

The board also discussed several other factors that suggest another rate cut might be coming, including reduced growth in China, weaker-than-expected investment in Australia and a sluggish local economy.

China’s falling growth rates are partly due to a troubled property market, which represents a “significant risk” for Chinese growth and subsequent demand for Australian commodities, according to the minutes.

Board members also noted that Australian non-mining business investment is expected to recover slower than had been thought when the Reserve Bank prepared its monetary policy statement in February.

Another reason the board was concerned about Australia’s economy is that, compared to earlier forecasts, growth and unemployment are likely to take longer to improve.

At the same time, inflation is also expected to be slightly lower than previously forecast, giving the board scope to cut rates.

One argument against a third rate cut in 2015 would be the fear that this might foster imbalances in the housing market.

However, while board members expressed concern about “very strong” price growth in Sydney and “strong” growth in Melbourne, they saw “much more muted” trends in other capital cities.

They also noted the most recent data, which showed that there had been no increase in housing credit in recent months, either for investment or owner-occupancy purposes.

RBA open to further rate cuts despite Sydney housing boom
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