The Reserve Bank of Australia's decision to cut interest rates is a "last throw of the dice" to grow the economy and risks a real estate bubble.
QUT financial economist Dr David Willis warned the RBA's "somewhat confusing" move could "stoke the real estate fire" and create a bubble for house prices.
The RBA today (TUESDAY) cut the cash rate by 25 basis points to 2.25 per cent. Rates had been at 2.5 per cent for the previous 18 months.
"Today's cut, with the market expecting another .25 per cent cut shortly, is putting a significant light under the housing market and risking a house price bubble," Dr Willis said.
"The move is somewhat confusing given that inflation, the RBA's primary goal, is 2.3 per cent, within its 2 to 3 per cent band. Import price inflation will add to this figure in the second half of the year and any tick up in oil prices will put further upward pressure on inflation."
Dr Willis said the rate cut raised the possibility of the Australian dollar falling below the RBA's preferred level of around 75 US cents. The dollar fell and the ASX 200 spiked immediately after the RBA's announcement.
"If low interest rates are the prerequisite to broad economic growth through investment, this should have already occurred in Australia as interest rates have been at historic lows for quite some time," Dr Willis said.
"At best the RBA is signalling the need for fiscal spending to get the economy working as low rates is not doing the job in itself and won't going forward.
"The RBA may assume that consumers will spend any small windfall from the banks cutting rates, but, as it would have seen with past rate cuts, consumers have instead favoured paying down debt.
"This cut will also lead to poor deposit rates for savers and retirees, pushing some of them into more risky asset classes and with the stock market looking for some sort of return.
"For the RBA, this looks like the last throw of the dice if they expect a .25 per cent cut will add anything significantly to the growth in the economy going forward."
Media contact:
Rob Kidd, QUT Media, 07 3138 1841, rj.kidd@qut.edu.au
After hours, Rose Trapnell, 0407 585 901
