One more round of monetary policy easing is likely before official interest rates bottom out and stabilise, a respected economist within the residential construction industry in Australia says.
Following the latest 25 basis point cut by the Reserve Bank of Australia, Housing Industry Association Senior Economist Shane Garrett says subject to further economic data, a combination of benign inflation expectations and sluggish economic conditions should provide room for more rate reductions – albeit with the likely scope of any future cuts being restricted by official cash rates being already low and not having much further room to fall before approaching zero.
“My best bet at this stage is that they would be able to do one more rate reduction” Garrett says, adding that this would likely be followed by a period in which the central bank held monetary policy steady.
“Two things that are driving rates are economic activity on the one hand and inflation on the other. Certain aspects of activity have been slowing down. Unemployment has been ticking up and some areas of the economy have weakened a little bit, especially relating to consumer and investor sentiment. So there is a question mark over the growth capacity of the economy over the very short term as long as sentiment remains as it is.
“On the other side, you have inflation which, at the moment, the RBA is saying is pretty muted and could actually go down once we get the data from the September quarter. As long as inflation remains low, I think the scope for further rate cuts from the RBA is definitely on the cards.”
Garrett’s comments follow yesterday’s decision by the Reserve Bank to reduce the official cash rate from 2.75 percent to 2.5 percent.
Official interest rates are now two full percentage points lower than when the bank first started to ease monetary policy in 2011.
Whilst stressing policy action to reduce tax on new housing and remove supply-side impediments to residential building are necessary to underpin a home building recovery of sufficient magnitude to meet national housing requirements over the long term, building industry groups such as HIA have long argued monetary policy settings play an important role in stimulating residential construction activity.
Garrett says a modest upturn which started late last year shows the cuts of the past two years are having an impact – albeit with the magnitude of this having been slightly muted by banks withholding portions of past rate cuts and the recovery thus far being patchy at best.
“It definitely does play a role and so far has worked” he says.
The latest interest rate cut follows recent data relating to house prices and new home sales indicating that the strength of the housing recovery is gathering momentum, albeit with this following less encouraging figures relating to building approvals.
In its most recent forecast, HIA said it was not anticipating any increase in housing starts this year but expected modest rises of 2.5 percent in 2014 and 2.8 percent in 2015.