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More interest rate cuts to come in 2015?

It’s the one question that continues to be on everyone’s lips:
Will interest rates be cut again in 2015?

The official cash rate is currently sitting at 2.25 per cent – a record low – after the rate cut in February, and some economists are tipping up to another two or three cuts this year. There’s even talk of it dropping to an unprecedented level of 1.75 per cent (and a couple of wags have even tipped 1.5 per cent!)

Talk of further drops is being fuelled by the high unemployment rate, lower GDP figures (2.25 per cent slated for 2015), the softening of the Chinese economy, a mining sector that’s off the boil, non-mining business investment taking its time in helping boost the economy, lacklustre business confidence and an Aussie dollar that’s staying above the RBA’s preferred level (despite the Reserve Bank’s best efforts in the past to ‘jawbone’ the dollar down – i.e. exercise its persuasive power of talk rather than action). And that’s not to forget that they are now printing more money in Europe.

The fact that the Reserve Bank kept the cash rate on hold at its March board meeting took a number of economists by surprise; many had been predicting a rate cut to 2 per cent due to the weaker economy.

But on 3 March the RBA felt it appropriate to hold interest rates steady for the time being.

In his statement following the board’s decision, Glenn Stevens said: “Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.”

Various economists – those who didn’t tip that the RBA would cut the rate in March – felt the bank wanted to see how the rate cut in February was working. Which means that all eyes are now on the next round of consumer confidence date, not to mention the official employment figures, to determine whether there will be a rate cut in April.

Currently the unemployment rate is at 6.4 per cent – a 12 year high. And many are expecting it to increase as a result of the decrease in resources sector spending and investment.

In addition, business confidence has been declining, despite the RBA’s decision to lower the cash rate in February. Roy Morgan Research’s Business Confidence survey in February dropped by 9.2 points (down 8.0 per cent) from January (to 105.7). The February confidence level is now well below pre-election levels and 22.5 per cent lower than its peak of 136.3 in October 2013, immediately following the federal election.

“The decline in business confidence during February was most likely a result of continued uncertainty regarding the level of the budget deficit, difficulties getting elements of the budget expenditure cuts past the Senate, wangling over leadership, negative employment outlook, global economic issues (including much focus on Greece and China), as well as a general ambivalence in Australian consumer confidence,” says Norman Morris, industry communications director with Roy Morgan Research.

“The [February] RBA rate decision [to decrease the cash rate] not only failed to counter all these negative factors but possibly sends a message that they are concerned about the economic outlook for Australia.”

The industries that it was hoped would make up for the decline in the iron ore price and mining investment continued to show a rather subdued outlook and are unlikely to make up for the loss, Mr Morris said. However, there are a number of positive major sectors. These include finance and insurance; rental, hiring and real estate; information, media and telecommunications; and personal, repair and other services.

At this stage, many economists are suggesting that the tepid outlook for economic growth and predictions of a further rise in unemployment continue to suggest that further monetary policy easing is required.

Hot housing markets getting hotter

Booming housing markets in parts of Australia are also a likely reason the bank kept the rate on hold in March – and the overheated housing investment sector, in particular, continues to be a key area of concern. However, the RBA is dealing with that issue separately, as Glenn Stevens highlighted in his statement.

“Credit is recording moderate growth overall, with stronger growth in lending to investors in housing assets. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities over recent months. The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”

Australia’s prudential regulator (APRA) has also been keeping a close eye on the burgeoning property investment market and has set a limit on investment loans at 10 per cent of all loans.

For now, many are polishing their crystal balls to determine which way the Reserve Bank will go at its nine remaining board meetings for 2015.

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Lisa Llewellyn

Lisa started her working life as a property and financial journalist, working for media outlets including BRW, Radio 3AW and Australian Investment magazine. She turned her hand to PR and opened a boutique PR consultancy in 2001.

The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Homeloans Ltd.

  • Alan Murrie

    Until there is some control of interest rates for credit cards the average person will see little benefit from RBA cuts. Most banks don’t even pass on the rate change. Once Credit just put up their Credit card rate by 2%, to 22% after the RBA drop!!! I would also say that it means that property investors just lose a little less, rather than have all this extra money to spend.
    Sydney prices are being pushed up because that is where the Chinese want to live with their relatives. It doesn’t take much insight to see that many of these properties are not part of the bank lending system in Australia, most being purchased with cash. So RBA rate cuts are not going to “heat” the market.

    With the Federal cuts to science research, new discoveries will now happen overseas and there will never be a replacement for mining income. Such short sighted lunacy, we should be spending more on our science research not less.