How do Interest Rates Support the Economy?

It’s a case of same old, same old for the official cash rate in July. For the second month in a row, the Reserve Bank of Australia (RBA) has refrained from making any changes to monetary policy and kept it at 2 per cent.

The Housing Industry Association (HIA) said this decision was to be expected, but it’s likely to stoke further uncertainty. With home loan borrowing costs already at historic lows, this announcement isn’t likely to disappoint many homeowners, but there is some doubt about which direction the bank will take next.

“There will be persistent conjecture in coming months as to whether the easing rate cycle is over, or the RBA has another rate cut bullet or two it is prepared to fire,” Chief Economist Harley Dale said.

“Today’s announcement and accompanying statement doesn’t change that situation.”

Construction supports economy

Monetary policy has had a big influence on the trajectory of Australia’s economic growth, especially in the fallout from the mining boom. This is particularly true in regards to the construction sector, which has been a steady undercurrent of support over the past year. Further research from the HIA shows that residential construction isn’t only important for affordability – it’s also one of the strongest performers in the national economy.

CoreLogic RP Data Head of Research Tim Lawless said this is a definite positive to come out of the low interest rate environment. While dwindling mortgage rates have propped up value growth in cities like Melbourne and Sydney, the importance of interest rates to supporting housing construction cannot be overlooked.

“The strong housing market conditions have provided confidence to developers and builders which has led to a surge in new housing construction,” he said.

While engineering and mining brought the overall performance of the construction sector down in June, the Australian Industry Group/Housing Industry Association Australian Performance of Construction Index shows house and apartment building was a bright spot. In fact, just one look at the latest building approval figures can give some idea of the strength of residential construction.

The Australian Bureau of Statistics (ABS) shows a 2.4 per cent increase in total dwelling approvals during May alone, and an 11.6 per cent rise over the 12 months to May. In fact, the HIA says May posted the third highest monthly total on record – and culminated in a new record for approvals over any twelve-month spell since 1983.

With interest rates having a such a large influence on the property market, homeowners will likely be waiting with bated breath to see what the RBA will do over the coming months. Whatever the outcome, our team of home loan experts at Police Bank can structure a home loan that suits your financial circumstances and ambitions.