Another rate cut on the cards for February

Many people rejoiced when the Reserve Bank of Australia (RBA) cut interest rates last year, which saw a reduction in interest payments for borrowers in an attempt to stimulate the nation’s economy.

Such a reduction is going to put a number of households experiencing mortgage stress at ease and is sure to provide an abundance of immediate and short-term benefits for Australia’s housing market.

The steady interest rate cuts of 1.5% to 0.75% since June 2019 have many people wondering if they will see them fall even further in 2020, and raises pertinent questions as to whether that will be a good thing for Australia’s property market in the long run.

Whilst lower interest rates provides greater confidence for those who have a mortgage and those looking to enter the property market, there’s a danger that the housing market can be sent into overdrive and a litany of unintended consequences could occur as a result.

An example of the problems that could arise because of further cuts includes a potential boost in asset prices without the desired stimulation of the economy to combat such hikes.

The talk of further cuts by Australia’s central bank in 2020 has gathered steam in recent weeks, with the bushfire crisis and Wednesday’s news of the Iranian missile strike on a base hosting United State troops in Iraq having significantly increased the inferred probability among economists that the RBA will cut the rates by 25 basis points in February.

And while a second interest rate cut this year is doubtful, the enormous damage seen in Australia’s worst bushfire season on record in particular threatens to negatively impact the economy for a lengthy period of time; which has the potential to add further pressure on the RBA to reduce rates once again.

Moody’s Analytics economist Katrina Ell said the bill incurred from this summer’s fires could exceed that of the Black Saturday fires to the tune of $4.4 billion.

“The risk of adverse spillovers to the broader economy is high, given the scale of the fires as well as it being still early in the bushfire season,” she said.

 “In those fires (Black Saturday), 450,000 hectares of land were destroyed. For comparison, 6.3 million hectares of land have been burnt in the current blazes.”

As it relates to the likelihood that the central bank would cut interest rates as a result of the natural weather event, Ms Ell said they have only been amplified because of the fires.

“Odds were already high that the RBA would cut interest rates at its next meeting,” she said.

“The fires increase those odds.”