RBA Slashes Interest Rates To All-Time Low Of 2%

Following India, China, Korea, Canada and Singapore, the Reserve Bank of Australia (RBA) too has slashed its interest rate to an all-time historic low of 2 percent. It decided to cut the rate by 25 basis points owing to increase in the property prices in Sydney, a fall in the iron ore prices and a robust Australian dollar. The Australian currency started to drop after the announcement. It fell from 78.54 US cents to 77.95 US cents but quickly bounced back to 78.83 US cents.

RBA Governor Glenn Stevens strongly defended the move saying that a slashing of rates was needed due to the dismally high reduction in the costs of key commodities. The plunging prices of iron ore due to diminishing demand from China coupled with an overabundance of supply have taken its toll on government’s tax revenue and miners’ profits as well.

Though borrowers have been asked to maintain the same monthly repayments, yet this action is expected to add fuel to the volatile Sydney housing market.

Treasurer Joe Hockey justified the move by the RBA saying that this would result in economic boom by creating more avenues for employment. He has exhorted people to invest more in the economy by greater borrowings.

“I say to the Australian people directly, now is the time to borrow and invest whether you’re a household or small business, now is the time to have a go to borrow some money and to invest. Invest in the things that help to create jobs,” he said.

But some like Peter Arnold from RateCity have advised caution. He says since high investments entail higher risks, one needs to be cautious with what one invests in. Sam White from Loan Market thinks that this would add momentum to Sydney’s real estate sector and could amplify property prices there over $1 million. He says that long-term gains must be kept in mind and for that to happen it is necessary that the property market acquires constancy and thus boosts confidence.

Shadow Treasurer Chris Bowen has slammed the move. He says, “For months the Reserve Bank has been saying that the conditions are there for economic growth but that business and consumers lack confidence. With the economy in transition, confidence is more important than ever before – confidence which this Treasurer by his words and actions has killed.”

The apex bank had left rates on hold at 2.25 percent in April. The last slicing of rates was in February when the cash rate was reduced from 2.5 percent to 2.25 percent.

The writer can be contacted at ritambanati@yahoo.com