Market prepares for rate cut

The Statement on Monetary Policy released by the RBA mid-August has revealed a slowing industry and easing demand – conditions which have brought to light the probability of an official rate cut.

According to the report, measures of consumer sentiment and the pace of household credit growth are at their lowest levels since the early 1990s while housing loan approvals have plummeted by 25% since mid 2007 and the price of housing has experienced a small decline in recent times.

This has led the central bank to indicate a change of direction.

“In early June, the market was pricing in an additional tightening in monetary policy in 2008, but with mounting evidence that domestic demand is easing the market now expects two reductions in the cash rate in the coming months,” the Statement said.

The announcement has fuelled speculation that the central bank will drop the official cash rate by 25 basis points as early as its next board meeting.

Among indicative factors that such a cut was expected, Mortgage Choice has reported a decided swing away from fixed rates in favour of basic and standard variable products.

Demand for basic variable rate loans in July rose to 33% of all approvals – the highest level in more than two years, while standard variable rate loans held 45% of the market. In contrast, fixed rate loans secured a mere 11% of all approvals.

Mortgage Choice national corporate affairs manager, Warren O’Rourke said that this was a significant swing since November, when demand for fixed rates was at a high of 41%.

“Of particular interest to home loan borrowers, was the recent indication by the Reserve Bank of Australia that there is scope to move towards a less restrictive stance on monetary policy which should be good news for mortgage interest rates,” he said

“This trend [of falling fixed rate demand] confirms the view held by many borrowers that interest rates are nearing the top of the cycle.”