If you’ve been keeping track of central bank decisions, you’d know that the Reserve Bank of Australia (RBA) slashed interest rates by 0.25% this month. But do you know what really went on during the RBA officials’ monetary policy meeting? If you checked out the official transcript of the RBA’s May policy meeting but barely made it a couple of paragraphs without dozing off, lemme just give you this quick lowdown on the report instead.
They lowered interest rates this month because…
GDP growth has been subpar, price levels have been dropping, joblessness has been climbing, and external demand has weakened. In other words, the Australian economy has been crying out “Help me! Please!”
During times like these, central banks usually ease monetary policy by either increasing money supply or cutting interest rates in order to stimulate lending and spending. The RBA picked an interest rate cut as their weapon of choice to prod consumers and businesses to spend rather than to save in hopes of boosting overall economic activity. Later on, this could translate to stronger hiring and more investments as businesses ramp up their operations in order to meet the growing demand.
What about China?
Since Australia is an export-driven economy, the country had been able to rake in a lot of trade revenues from its commodity shipments to China. The fact that the world’s second largest economy happens to be Australia’s trade BFF was enough to guarantee that strong demand from China would keep growth supported, but this hasn’t been the case these days.
If the Chinese central bank’s recent easing efforts are any indication, it’s that their officials are also scrambling to shore up economic activity in China. Desperate times call for desperate measures, so they say.
As it is, the Chinese government is spending less on infrastructure projects while house prices have been falling, both of which sparked a downturn in demand for Australia’s steel and iron ore exports to China. RBA officials highlighted this ongoing slowdown in China and the uncertain economic outlook in the country’s property market as additional reasons for cutting interest rates.
What about Australia’s housing market?
On a more upbeat note, RBA policymakers acknowledged that the housing sector has shown a few green shoots. The minutes of their monetary policy meeting indicated that growth in home and investment credit has stabilized and that the recent interest rate cut could add fuel to the acceleration in housing demand. After all, lower interest rates would mean cheaper mortgages, which is encouraging for potential home buyers.
RBA officials did note that there are some risks associated with spurring housing demand, as this could wind up putting upward pressure on home prices (Does the Law of Supply and Demand ring a bell?) and might lead to a property bubble. For now, only Sydney and Melbourne have been seeing a surge in house prices while other cities have reported muted gains, so there’s no need to panic about this just yet. RBA Governor Stevens and his men are ready to work with government officials and property market regulators to keep these risks contained anyway.
So, are they cutting rates again or what?
Maybe, maybe not. As always, future monetary policy decisions hinge on economic data, and the latest RBA minutes didn’t contain any forward guidance on interest rates. Instead, central bank officials focused on the Australian dollar’s appreciation and its negative impact on inflation and trade activity. After all, a stronger local currency makes imports relatively cheaper and exports more expensive in the international market, resulting to a downward drag on CPI and lower demand for Australia’s shipments.
Besides, the RBA already cut interest rates back in February so policymakers might be inclined to wait a few more months again before considering another easing attempt. Moving forward, RBA Governor Stevens could simply stick to his usual jawboning routine while waiting for the impact of their recent rate cuts and the PBOC’s easing moves to kick in.