New interest rate cut defies threats of a housing bubble

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By cutting the official cash rate to an unprecedented low of 1.5 per cent, the Reserve Bank of Australia has effectively squashed all threats of a property bubble while also shielding the dollar against a wave of global monetary policy stimulus and money printing.

Three of the nation’s biggest lenders--National Australia Bank, Commonwealth Bank of Australia, and ANZ Bank--passed on no more than half the cut to their mortgage holders, while Westpac cut its home loan rate by 14 basis points. The big four banks also simultaneously raised their short-term deposit rates by 55 to 85 basis points.

According to Reserve Bank governor Glenn Stevens, “The likelihood of lower interest rates exacerbating risks in the housing market has diminished,” indicating that the RBA has avoided inflating a house price bubble. “Supervisory measures have strengthened lending standards in the housing market. A number of lenders are also taking a more cautious attitude to lending in certain segments,” he added.

The central bank expects inflation to stay low for some time due to subdued growth in labour costs and low-cost pressures from other parts of the world. As early as the announcement, financial analysts have started speculating that the cash rate will further fall to 1.25 per cent by November.

“Another rate cut at the end of the year is also likely,” said CBA economist Michael Workman. “It’s about the lack of wages and inflationary pressures.

Once the cash rate falls below one per cent, the RBA might need to consider unconventional policies like quantitative easing.

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