RBA rate cut could inflate housing bubble: QUT economist

AN INTEREST RATE cut by the Reserve Bank of Australia tomorrow (Tuesday) would risk stoking the real estate fire a QUT economist has warned

QUT financial economist Dr David Willis said the RBA should not move on interest rates while inflation and the Australian dollar were at reasonable levels.

The RBA has kept the cash rate at 2.5 per cent for the past 18 months.

"The risk of lowering interest rates is that the market may assume the RBA will continue to cut further and the currency will fall below its preferred level," Dr Willis said.

"Last year the RBA made it quite clear that it would like to see the Australian dollar at about 75 US cents so with it currently sitting at 78 cents it is close to their preferred level.

"In addition the RBA doesn't want to risk stoking the real estate fire and potentially creating an artificial bubble in the housing market.

"So I cannot see any hard and fast reason why the RBA should move."

Dr Willis said he expected growth in the Australian economy would be below the long term average but the chances of a recession were "close to nil".

"With inflation still in the middle of its preferred range, there is no really compelling reason to lower rates as the economy is not in danger of deflation, as it is in Europe and Japan, and is in no danger of recession," he said.

"The AUD will fall over this year but it will be a slow decline which the economy can adjust to as it falls.

"The Australian economy is still under structural change from mining to consumption-led growth. But with low interest rates already and low petrol prices, there is enough stimulus in the economy and plenty for the consumer to either spend, save or pay debt down."

Dr Willis said the rate of unemployment was the main issue for the RBA.

"But dealing with this may be more a need for fiscal stimulus than anything the RBA can do as monetary policy is already quite accommodating," he said.

www.qut.edu.au

ENDS