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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