Does the RBA have scope to cut rates below 2%?

by Julia Corderoy20 Nov 2014
The Reserve Bank could have scope to slash interest rates below 2% due to high unemployment and weak consumer confidence.

According to two research analysts from financial services company Credit Suisse, the rate cutting cycle is not over yet, despite rising house prices. In the research report authored by analysts Damien Boey and Hasan Tevfik, titled ‘A strong case for more RBA rate cuts’, they argue that the cash rate has room to drop another whole percent.

“Leading indicators suggest that a case can be made for further cuts. Confidence is low and consistent with weak growth. Inflation expectations are falling and the unemployment rate is rising. Also, mortgage principal repayments are rising, as interest-only loans reset. All factors point to lower rates. Our model suggests that rates could fall to 1.5% over the next year.”

The October data released by the Australian Bureau of Statistics saw the unemployment rate hover at a high 6.2%. Craig James, chief economist at CommSec said the jobless rate will probably continue to hover near 6% until well into the 2015 year.

The latest consumer confidence rating by ANZ/Roy Morgan saw the confidence fall by 1.6% in the week to November 16, after rising by 0.2% in the previous week. The confidence rating is down 2.8% on the 7-month highs recorded for the week to July 27.

In its minutes of the November Monetary Policy Meeting, the Reserve Bank said labour market conditions have remained “subdued” and inflation declined in the September quarter. The year-ended rate of consumer price inflation declined to 2.3% from 3% previously. 

The Credit Suisse report also argued that the heated housing market could encourage the Reserve Bank to keep interest rates low, due to the amount of mortgage debt consumers are bearing. 

“As principal payments have risen, the ability of households to tolerate higher interest payments has fallen, putting pressure on the RBA to keep interest rates lower for longer,” the report said.

On the flip side, mortgage delinquency rates are at record lows according to national mortgage insurer, Genworth. Figures released by the insurer this month saw delinquencies have been consistently lowering since hitting a peak of 0.53% in 2012. Currently, 0.36% of its national mortgage portfolio is delinquent.

Furthermore, CommSec economist Savanth Sebastian says the recent drop in consumer confidence is nothing to over analyse. 

“Despite the latest pullback, consumer confidence remains healthy. Over the past few months households have been generally upbeat and the mild pullback over the past week is probably more to do with a modest consolidation in sentiment than any deep structural issue with household finances. In fact confidence levels are holding just 2.8% shy of the seven month highs reached in late July.”

In its November minutes, the Reserve Bank indicated that interest rates were likely to remain steady for the foreseeable future.