Response Interest rate cut a prudent response

“Today’s (March 3 2020) decision by the RBA board to lower the cash rate is the prudent course of action.

“The reduction in the cash rate in 2019 was critical to slowing the decline in the residential building that has been a major drag on economic growth.

“It is now clear that travel and trade restrictions between China and Australia will weigh on the domestic economy. It is prudent to move early to ward-off more significant impacts.

“The residential building industry has some exposure to the trade and travel restrictions, but at this stage home building prices and project completion times haven’t been affected.

“As for imported building products, it is currently unclear when the supply of these products will start to be affected by the restrictions. Suppliers are currently enacting their contingency plans for alternate sourcing. Product availability may be affected in the short term as alternate sourcing options are established.

“This is a very well anticipated ‘shock’. A sudden economic correction in China has been widely expected for a number of decades, perhaps not this specific scenario, but one that large businesses should have considered.

“Of greater concern is the likely effect on the wider domestic economy, particularly through the tourism sector. It is a large employer and China is a major source of demand.

“In this respect, monetary policy can only go so far to mitigate the impacts of these restrictions. Targeted fiscal policy is a better tool to address risks affecting specific regions or sectors of the economy.

“In lieu of lower interest rates, the wider economy could be adversely affected and this overall economic weakness would in turn weigh on building activity,” concluded Mr Reardon.

Source: HIA