Interest rates on hold but economists tip cut for Melbourne Cup Day

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Sept 1, 2015| Kirsten Robb| Domain

http://www.domain.com.au/news/interest-rates-on-hold-but-economists-tip-cut-for-melbourne-cup-day-20150901-gjca4k/

The official interest rate remained on hold at 2 per cent on Tuesday but economists say the Reserve Bank of Australia may be forced to cut rates by November, making Melbourne Cup day a winner for mortgagees and spring buyers.

The move to keep rates steady was widely expected, with experts agreeing the central bank is taking a ‘wait and see’ approach after cutting in February and May.

Both AMP chief economist Shane Oliver and Domain senior economist Andrew Wilson forecast a cut to 1.75 per cent to come on the first Tuesday in November.

“I think if it’s going to come, it will probably be November,” Dr Oliver said.

“On balance, the RBA will be forced to cut interest rates again. The reason is the economy is continuing to run at a very sub-par pace.”

The economy is continuing to run at a very subpar pace. Dr Shane Oliver

Dr Oliver said business investment figures released last week suggested a bleak outlook and unemployment was drifting back up modestly, giving the RBA pause for concern.

He also said the Australian Prudential Regulation Authority was asking banks to hold more capital, meaning their costs were going up. He said the Reserve Bank may move to cut rates to avoid lenders passing on that rise to owner-occupier mortgagees.

A Cup Day cut

The Reserve Bank has a history of moving rates on Melbourne Cup day.

“That’s because there’s no real point in acting in December, and there’s no decision in January,” said Dr Wilson.

“To act in November means there’s still some impetus for interest rate cuts to be effective in that year, with a spring market in full swing.”

Dr Wilson also said a slightly cooling housing market may also add to the case for a further cut.

“Even though we’ve had an exceptionally strong June quarter for prices growth there are growing signs that the Sydney market is just coming off the boil,” he said.

“Clearance rates have certainly tracked back downwards over August and are now below where they were a year ago. Other housing markets are modest or moderate at best, with the exception of Melbourne, which has had a good pickup over the last quarter.”

An inevitable rise

But despite anticipation of a cut by the end of the year, commentators do see a rise further on the horizon.

Merrill Lynch chief economist Alex Joiner forecasts the RBA will not make another cut this year, saying a declining Australian dollar will prevent it from taking further action.

“[A lower dollar is] what the Reserve Bank wants to see, they’ve been frustrated by lack of response in the economy to lower interest rates,” Mr Joiner said.

Mr Joiner previously told Domain Australians needed to be more cognisant of the fact interest rates would inevitably rise.

“We’re now in a situation where interest rates are at record low levels because the Reserve Bank wants to stimulate the economy, but they’re not going to stay there forever, that’s for certain. They might be down for a long time, but at some point they have to come up.”

However, he said, the current environment would likely give owner occupiers and first home buyers more confidence to get into the market.

Marshall White director John Bongiorno hopes rates remain on hold for some time yet in order to boost confidence in the economy. He said buyers were remaining “fairly sensible” about an inevitable rate cut and were not overly committing to loans.

“I’d be worried about anyone out there gambling on rates coming down or on property prices continuing to rise,” he said.

But buyers advocate Cate Bakos said she had found herself reminding people that rates are at historic lows.

“It’s human nature to have a short memory about this sort of thing. But people who weren’t around during the double digit rate period don’t know what our parents had to go through,” Ms Bakos said.

“If people think a 7.5 per cent is a hefty [mortgage] rate, we are in trouble … That shouldn’t ever be interpreted as standard. There will be a blood bath if people think historic low loans are here to stay.”

But Dr Oliver, Dr Wilson and Mr Joiner all agree a rise is not likely until late next year.

 

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