RBA should focus on fewer, larger rate reductions: Residex

Residex analyst John Edwards says the Reserve Bank should lower interest rates next year, but say they out to do it in fewer, more substantial cuts

News

By

Economists are keen to understand if Australians are going to continue their new-found savings model and self-imposed modest austerity program, says Residex Pty Ltd’s John Edwards.

He says consumer activity at this time of the year will provide a clue as to how Australia will perform over the next few months and provide a view to the likely future movements in the RBA interest rates settings.

“Housing markets, while they have done better in 2012 compared to the previous year, have failed to keep pace with inflation. The majority of cities have produced negative real rates of growth (after taking inflation into account). In fact, the real growth was a -2.8% in housing while for units it was -1.23%.”

Edwards says it’s obvious that interest rate reductions made by the RBA are not having the same impact on the housing market as they once did.

“Perhaps this is a good thing as RBA governor Glenn Stevens has made it clear that if house prices increase by double digit numbers as they have done before, this would cause concern and action would need to be taken to ensure a house price bubble did not eventuate.”

He says Residex data suggests there’s a more important driver of house price growth.

“This indicator is the one to watch more closely than the changes in the cash rate in the coming 12 months. This does not mean that cash rate changes won’t have some impact; it simply means its importance has been diminished.”

The information does suggest that the RBA’s action did assist in arresting value adjustments that were taking place and that the more important driver is now taking hold and Edwards says they’ll have to reduce rates even further to avoid house prices falling into another period of correction.

“The data appears to support the view that sentiment and housing market performance are strongly related. In the recent past, sentiment seems to be leading the housing market, but not particularly strong in any one direction.”

Edwards says that, in a situation where consumer sentiment becomes a significant part of the equation and rate reductions are having minimal impact, it’s important to avoid doing things that have a tendency to unsettle or reinforce the negative view of the future.

“This suggests that fewer rate reductions of a larger scale may well be more effective than a constant string of small adjustments that are constantly causing poor press about the economy.”

 

 

Keep up with the latest news and events

Join our mailing list, it’s free!