Europe fears and housing worries among reasons for December rate cut: RBA minutes

The deteriorating situation in Europe and concerns about the state of both the local housing market and China’s housing market spurred the Reserve Bank Monetary Committee to cut interest rates by 25 basis points to 4.25% on December 6, according to minutes from the meeting released today.

“After a positive reaction to the EU summit in late October, financial market sentiment deteriorated through most of November, reflecting the difficulty European policymakers were having in dealing with the debt crisis, as well as political instability in several euro-area countries,” the minutes read.

The board also notes that strains in “European interbank markets also intensified” in November while “wholesale debt markets globally appeared to be closed to many financial institutions”.

The last comment acknowledges the higher funding cost concerns expressed by Australian banks in recent AGMs and the decision by ANZ to decouple its interest rate decisions from future RBA announcements.

The RBA remains concerned about the state of residential housing, noting that “residential approvals had continued to decline, with the large fall estimated to have occurred in October in contrast to the recent upward trend in grants to first-home buyers”.

“Approvals in Victoria had fallen significantly in recent months after the sharp run-up through 2010, while housing indicators for New South Wales were showing some signs of a pick-up.

“In recent liaison, some contacts, including in the property industry, had reported signs of a tightening of credit conditions, and overall growth in business credit outstanding remained weak,” the minutes read.

Further on the RBA notes that conditions in the housing market remain “subdued”.

“Housing prices were estimated to have fallen in October and were down by around 4% over the year. Members noted that prices had fallen by more in higher-priced suburbs. Housing credit was increasing at an annualised rate of 5% to 6%, as it had for much of the past year.”

On the global housing front, the RBA board notes that “conditions in the Chinese housing market were noticeably weaker than over the past couple of years, reflecting the effect of controls on buyers and tight credit supply for developers”.

“Members noted that this slowing was in line with the authorities’ intentions. The slowing in private housing construction was being offset by growth in construction of social housing, but production of crude steel had fallen somewhat in recent months.”

In coming to its decision to cut the cash rate in December, the RBA weighed up “further evidence that a major investment boom was in progress and the overall economy was expanding at a pace broadly in line with trend” against “developments in Europe [that] continued to pose downside risks to the global economy and, consequently, also to Australia”.

“These risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict,” the RBA decided. 

“In these circumstances, and given the expectation that inflation would be consistent with the target over the next couple of years (abstracting from the effect of the carbon pricing scheme), members felt that there was scope for a modest reduction in the cash rate at this meeting.”


Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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