Housing, retail industries welcome rate cut but economists mixed on next step

The property and retail industries have enthusiastically welcomed the RBA’s decision to slash the official interest rate by 25 basis points to 4.5%, saying it will deliver their respective sectors a boost ahead of Christmas and ensure sales remain strong.

Economists, who had mostly predicted the rate cut would occur, have also affirmed their forecasts but remain mixed as to when the next move for interest rates will occur.

The Housing Industry Association said yesterday the cut was “well timed”, with acting chief economist Andrew Harvey saying it may likely deliver a new wave of buyers to the market – especially as the Commonwealth Bank, Westpac and ANZ have all announced moves to slash variable interest rates.

“I think it’s a very important change in the environment for new homes, mainly because not that it’s a big impact, it’s somewhere around $50 a month. It’s much more about confidence, and the direction of interest rates more generally.”

“We have people looking for a home and have a deposit saved, but are scared about talk of interest rate hikes, so I think it’s very important in terms of confidence and you’ll start to see new home buyers coming back into the market.”

A new rush of buyers could help stop price declines, some experts say, as more potential home owners will help balance the current level of oversupply.

According to forecasts from SQM Research, if a rate cut is taken into account then price declines in Brisbane, Darwin and Melbourne could be limited to just 2%, with Hobart and Canberra actually recording increases.

But the joy hasn’t been limited to just the property industry. Yesterday the Australian Retailers Association praised the move, saying it would deliver plenty of relief for small businesses.

“The RBA has made consumer relief from mortgage stress and the soaring cost of living a safe bet, and this will hopefully resonate through the sector, meaning positive things for growth and employment.”

“While retailers still have a long road ahead towards long-term economic recovery, this will at least be a short-term boost for retailers who were bearing the brunt of the pressures on consumers brought about by mortgage stress, the soaring cost of living and having to negotiate new taxes into their household budgets.”

Meanwhile, economists have mostly welcomed the announcement, although many are mixed as to when the next cut will occur. ANZ’s Ivan Colhoun wrote the bank believes the next rate cut will occur in February, although this is a “finely balanced call”.

“How consumer and business confidence responds to this interest rate cut will be very important in whether a further move is forthcoming from the RBA,” he writes.

CommSec chief economist Craig James pointed out the cut was the first in 31 months, and argued that this was “clearly the best news that many people have had in quite awhile”, given this year’s natural disasters, rising energy bills and current market turmoil.

He also points out the lower rates will keep a cap on the Australian dollar, ensuring a good result for the tourism and export sectors.

“Effectively the Reserve Bank has admitted that it got it wrong. In August the Reserve Bank was set to hike rates. But it has become abundantly clear that inflation was under control and financial conditions were tighter than necessary.”

However, he points out that no one should expect a follow-up move any time soon, saying it may be similar to a cut made in December 2008 when that was the only move made within 27 months.

“The Reserve Bank has now moved back to a more neutral stance – that suggests rates could move either way in coming months. If rates are moving anywhere in the short-term, clearly it’s down, rather than up.”