By Ken Atchison, CEO, Atchison Consultants
A further reduction in interest rates by the Reserve Bank of Australia (RBA) should not occur in the near future. That’s not to say the RBA won’t cut the overnight cash rate. However, the extraordinarily low-interest rate of 1.25% is already too low and the RBA should not cut it.
Analysis by the RBA might show the prospect of falling employment as likely. Nevertheless, it is not currently occurring. Prices of goods and services are still rising, albeit in a restrained manner, while asset prices are already inflated.
If stopping falling house prices from a high base is the reason for lower interest rates, then the RBA’s rationale is misguided.
Previous reductions in official interest rates have increased the capacity of Australians to borrow, typically for further house purchases. As shown in Chart 1 the relationship between the ratio of disposable income to household debt and house price movements is strong.
Chart 1 – Housing Prices and Household Debt
