Rates to fall, but not by much: Oliver

by Adam Smith10 Nov 2011

Interest rates will continue to fall, but don't expect massive cuts.

That's the message from AMP chief economist Shane Oliver. Westpac has predicted a further 75bps of cuts, while markets are pricing in up to 110bps over the next year. However, Oliver told Australian BrokerNews it is unlikely the Reserve Bank will move aggressively on rates.

"There's nothing to suggest an aggressive easing cycle," Oliver said. "Seventy-five to 100 sounds a bit extreme to me. To get those kind of cuts the economy would have to fall apart, which I don’t think will occur."

Cuts this aggressive would only occur if the crisis in Europe severely deepened or commodity prices crashed. Instead, Oliver has predicted a milder easing of rates in the year ahead.

"Certainly the risks are there, but I think a more likely scenario is we maybe get another 25, or at most 50. I think the market has probably priced in a bit too much," he said.

While deep cuts to the cash rate are unlikely, Oliver stated it is even more unlikely that the RBA will return to tightening rates anytime soon.

"The resumption of rate hikes and the shift onto higher levels is probably very unlikely. There’s more risk that the market’s right with its 110bps of cuts," Oliver said.

A series of rate increases would likely push stressed homeowners over the edge and cause a "U.S.-type scenario", Oliver stated. Last year's rate hike proved that mortgage holders are more sensitive to interest rate movements than they were prior to the GFC, meaning slightly higher rates could have far more profound consequences.

"What the RBA was talking about as being mildly restrictive was probably quite tight. The mortgage rate in the historical context was quite low. It wasn’t as if it was anywhere near previous highs, but I think people’s attitudes have changed. Therefore, what was thought to be mildly restrictive was actually quite tight, and now the RBA is having to correct that," Oliver said.

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  • by Wes 10/11/2011 12:16:26 PM

    I have correposndence and webcasts of Shane at the height of July 2008 when rates were nudging 9% talking about rates hitting 11%. Within 4 months they were closer to 5%. Holds no weight.

  • by MattJ 10/11/2011 2:26:32 PM

    Yes, fancy Shane not predicting the US Sub-Prime crisis when so many others did! I myself locked our own loan in for 3 yrs at 8.5% earlier that year, much to my wife's subsequent scorn.

  • by Spinner 12/11/2011 8:55:47 PM

    Was the prediction 11%? Not so good on the resume. Maybe predicting 0.25's either way you can't go wrong.