Reserve Bank cuts rates to new record low of 2.25%

The Reserve Bank of Australia has cut rates to a new record low of 2.25%.

It was the most eagerly debated decision among economists for some time.

It was only a few months ago the majority of experts expected a rate increase. 

Australian Property Monitors’ Andrew Wilson was among the first to lean towards a cut coming.

The rate of 2.5% had been stable throughout 2014.

The cut suggests the bank does not have an obsession with Sydney house price directions.

“The decision by the Reserve Bank to cut the cash rate by 25 basis points is likely to take the typical standard variable mortgage rate down to 5.7% and discounted variable rates to 4.85%; the lowest cost of mortgage debt since July 1968,” Tim Lawless, the head of research at CoreLogic RP Data said.

“Lower mortgage rates have the potential to add some fuel to what are already strong housing market conditions (dwelling values Australia’s capital cities have already increased by 19.6% since interest rates started falling back in November 2011), however the stimulus from lower rates may not be as influential on housing market conditions as what we have seen in the past.

“Lower consumer confidence, stricter serviceability requirements for borrowers, tighter lending conditions for investors, affordability challenges and low rental yields are all factors that may contribute to the moderation in housing market conditions over 2015.

“The ideal outcome for the Reserve Bank under the new interest rate setting would be that housing market conditions continue to moderate back to more sustainable levels, but housing demand remains strong enough to keep dwelling construction at the current high levels and new home sales relatively high.

“The challenge for the Reserve Bank is to stimulate stronger economic growth without over stimulating the housing market,” Lawless suggested.

This article first appeared on Property Observer.