Making the scenario of steady interest all the more problematic is the resilience of the Australian dollar which is being underpinned by current interest rate settings which has Australia one of the highest interest rate countries in the industrialised world. As a result, money continues to flood into Australia to underpin the Aussie dollar.
It seems the RBA and the market have ants in their collective pants about the possibility of higher house prices if interest rates were cut further. This ignores a couple of vital issues. Mortgage interest rates are already rising on the back of the rise in bank funding costs so a cut in official interest rates would at least partly reverse some of that pressure just when the economy needs it.
As noted, house prices are poised to weaken, perhaps even fall sharply, as the glut of property hits the market and investor demand falters. The fresh supply of housing will have a more significant dampening effect on dwelling prices than a small fall in interest rates. Thinking a rate cut from the RBA would underpin house prices is to ignore the other drivers of house prices.
Perhaps most importantly, it is the business sector that would be a significant beneficiary of lower interest rates with cash flows freed up on existing debt and the hurdle to borrow more for much needed investment lowered.
The economy is not disasterously weak, but it needs an injection of policy stimulus and interest rates can be cut quickly and easily and the RBA should simply do it.
It costs nothing, the global economy is hardly poised for an inflation break out and the risk that Australia’s inflation rate will skyrocket anywhere near the top of the RBA target band on a rate cut of even t50 basis points is fanciful.
A cold hard look at economic facts screams lower interest rates are needed. A convoluted, model based rose coloured forecasting strategy says rates should be on hold.
The RBA needs to put its fancy model aside for now and get into the real world and cut interest rates – and do it soon. RBA, your country needs you.