The Reserve Bank has signalled that further cuts to official interest rates remain a live option despite the risk of refuelling a property bubble in Sydney and Melbourne.

Key points: The Reserve Bank has slashed interest rates three times since June

The Reserve Bank has slashed interest rates three times since June Markets have priced in a 59pc chance of a rate cut in November

Markets have priced in a 59pc chance of a rate cut in November RBA could review its plans to cut rates if house prices rise excessively

In the minutes from its October meeting, when the cash rate was cut to a record low of 0.75 per cent, the RBA board noted "the housing market and other asset prices might be overly inflated by lower net interest rates".

While the RBA board did not see the risk of another bubble outweighing the need to cut by another 0.25 percentage points, it would cautiously monitor the potential consequences of lower rates in the economy.

"This assessment would need to be reviewed if rapidly increasing asset prices were accompanied by materially faster credit growth, weak lending standards and rising leverage," the minutes noted.

"Although household debt was still considered high, members only saw a limited risk of excessive borrowing.

"The memory of recent house price falls is fresh and banks are still quite cautious in their appetite to lend."

Further rate cuts ahead

The RBA minutes also warned that global asset prices being driven higher by record low rates were exposed to any potential global shock given high debt levels that had run up since the global financial crisis.

"Any shock that caused markets to increase risk premiums or revise upwards expectations of future policy rates ... could see a broad range of asset prices fall," the minutes said.

"A fall in asset prices could result in financial stress for some businesses and households, which could spill over into financial institutions."

The October board meeting took place in Melbourne a fortnight before Treasurer Josh Frydenberg asked the Australian Competition and Consumer Commission (ACCC) to investigate mortgage pricing practices — after the major banks failed to pass on the most recent cash rate cut in full.

The minutes made no mention of the banks' ability to fully pass on rate cuts, but signalled a further cut to the cash rate was expected by mid-2020 when the ACCC would be in the midst of its inquiry.

"The ongoing subdued rate of wages growth also suggested the economy had spare capacity," the RBA noted.

"There was therefore a case to respond to the general outlook with a further easing of monetary policy."

After 10 per cent falls in Sydney and Melbourne over the past 18 months, the RBA said housing equity has been reduced.

This has resulted in a small share of loans in negative equity, where an outstanding loan outweighs the value of a property.

However, the minutes said recent rises have reduced the risk of negative equity in the major markets — although half of all loans in Western Australian and the Northern Territory are now underwater.

Financial markets are betting there is a 59 per cent chance of the RBA cutting rates again, when it next meets on Melbourne Cup day (November 5).

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