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RBA cuts rates

The Reserve Bank of Australia has cut the official cash rate for the second consecutive month. The decision came as no surprise to many economists after last night’s share market fiasco. Australian shares hit a six month low at close of business yesterday, wiping approximately $23 billion from the share market. This teamed with the recent drop in national house prices, forced the Reserve Bank to cut the cash rate 25 basis points to 3.50 per cent.

The latest index data showed capital city home values fell by 1.4 per cent over the month of May which is a factor the Reserve Bank would have been conscious of when deliberating their interest rate setting. Such a significant fall over a single month was unexpected considering the cash rate was slashed by 50 basis points in the same month.  Not only did home values fall further in May, but we also saw consumer sentiment remain fairly steady suggesting the May rate cut has had little effect in stimulating consumer confidence and spending.  The rate cut today will provide a further boost to housing affordability, which the RBA has recently suggested is back around levels not seen since 2002.

The big question now is how much of the rate cut will be passed on by the banks privately and whether this will be enough to provide a shot in the arm for the housing market.