Speculation mounts for a rate cut

Negative economic factors mean a rate lower than 1.5% is “inevitable”

Speculation mounts for a rate cut

News

By Madison Utley

The Reserve Bank of Australia (RBA) may have announced another cash rate hold, but key industry players point to warning signs they believe indicate that a cut is coming.  

“A rate cut seems inevitable with so many negative factors weighing down economic activity such as the falling property market, the impact of the Hayne royal commission, concerns about unemployment, the election, the US-China trade war and the Brexit debacle,” said John Kolenda, MD at mortgage aggregator Finsure.

The 1.5% rate, which has been on hold since August 2016, was again maintained by the RBA yesterday with the intention of encouraging “sustainable growth” and reducing inflation in the national economy.

CoreLogic head of research Tim Lawless weighed in saying, “The strong labour market report for January was likely a key factor in keeping rates on hold, however in balance, wages have grown at a consistently low rate growth and inflation remains stubbornly below the target range.”

Lawless believes that a decline in the performance of the housing sector would likely correlate to a rate cut later this year.

He explained, “The sharp slowdown in residential construction activity and relatively benign retail trade figures may be hinting that weak housing market conditions are already spilling over to the broader economy.”

The housing market has continued to struggle and stagnate, despite banks steadily releasing products and special offers intended to draw in more customers.

Data provided by RateCity shows that 22 lenders have slashed rates on more than 150 fixed home loans this year as they battle to attract new borrowers. 

“No doubt the RBA are tracking housing market conditions very closely, watching for any further deterioration that might signal a dent to consumer spirits, resulting in less spending, more saving and a further pull back in residential construction activity,” said Lawless.

In Kolenda’s opinion, the central bank is biding its time as it waits for the federal budget to be handed down in April and the federal elections to play out in May, before deciding on an altered rate.

He believes that the recent commotion in the industry has caused further harm and also speaks to the likelihood of a future cut. 

“The lending landscape has been highly restrictive, complicated and confusing since the Hayne Royal Commission,” he said. “We have seen a dramatic reduction in borrowing capacity for consumers with many being disheartened by the scrutiny of the major banks in analysing their expenses and activities.”

According to Kolenda, the “gloomy global economic outlook and collapsing consumer confidence” have some economists predicting “at least” two cuts in the cash rate within the next year.

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