Rate cuts are on the way – but not for a while

Around the World, Central banks are dropping interest rates.  When will Australia follow suit?

Last month, Sweden dropped its rates.  This week, two of the biggest Central Banks (Canada and Europe) dropped rates by 0.25 per cent.  Denmark then followed suit.  Britain probably would’ve done too – but that they are in the middle of a General Election.

So, if some of our peers are starting to drop rates, does that mean Australia will too?  Yes, but don’t hold your breath.

Reserve Bank of Australia (RBA) Governor, Michele Bullock, told parliament this week that the RBA remains focused on the fact that while the economy is slowing, it is slowing from a very high level.

At 3.6 per cent, CPI remains well above the RBA’s 2.5 per cent target and inflation has stopped falling since December and edged up for the second straight month in April.

But, there’s little doubt the economy is slowing; earnings outside the resource sector increased by just 1.6 per cent over the past 12 months and anecdotally, I am hearing more-and-more pessimistic stories.

Three times this week, mates have told me their companies are retrenching staff; one an ASX listed company, one a Big Four consulting practice; the other an international architectural practice.

And a business lunch this week in Parramatta felt odd when less than 10 per cent of the tables were occupied.

The economy is barely crawling, but weak 0.1 per cent quarterly growth but that does not mean our rates will come down soon; having been slower to lift rates, it may well be that the RBA is the last of the G10 central banks to deliver a cut.
Our cash rate is 4.35 per cent – already lower than Canada’s 4.75 after the cut.

The RBA has a dual mandate – achieving full employment AND low inflation.  This is one reason why rates did not go that high, but also means the RBA has less room to cut rates.

There’s no doubt rates will come down – but not immediately, nor rapidly.  Canada has implied it will drop rates more but when Europe took it rates to 3.75 per cent it also stated that inflation would not return to target.

Our economy is holding up well compared to other developed countries, but we have a few more months of staying in and buying home brand products before rates come down.

Graeme Salt is an award-winning mortgage broker.  For a no-obligations consultation on your home loan needs, please contact him on 02 9922 5055.