Beyond interest rates – What the RBA told us

The RBA held the cash rate at a historical low of 2.25% following its April monthly board meeting this week, although it signalled there could be another interest rate cut in the coming months.

Very low interest rates have already kick-started Australia’s housing market over the past year, with a lift in both dwelling prices (particularly in Sydney) and residential building activity – the latter being a trend also noted in this morning’s Australian Performance of Construction Index (Australian PCI®). The RBA did note that regulators are concerned over the strength of investor activity in Sydney and are implementing measures to rein in lending for investment in Sydney’s housing market.

In a welcome and long-awaited sign, business borrowing has also strengthened over recent months. The latest RBA data showed that business borrowing in February grew at its fastest pace in six years. Overall business investment has been weak in recent years across different types of investment.

Looking ahead, the Capex survey suggests machinery and equipment spending will be subdued, and commercial construction activity is soft with non-residential building approvals sitting at very low levels. Engineering investment is also forecast to slow further as resources sector investment slows.

While low interest rates should support business investment in the months ahead, the RBA acknowledges that a lift in confidence, or so called “animal spirits”, is needed to underpin a solid recovery in investment.

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Yi Ming joined Ai Group as an Economist in 2013. He has broad experience covering economics and financial markets, having previously worked as an economist for the Reserve Bank. Yi Ming holds a first-class Honours Degree in Commerce from the University of Melbourne and is a CFA charterholder and a CPA.

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