RBA “coming round” to need for November rate cut and 2.5% cash rate: Shane Oliver

The RBA is likely to cut the cash rate again on Melbourne Cup Day (November 6) with another rate cut in the March quarter, according Shane Oliver, chief economist at AMP Capital.

Oliver expects the cash rate to fall to 2.5% over the next six months to deliver a variable mortgage rate of around 6%, a setting which will encourage growth and improving consumer and business confidence.

According to Oliver the current average standard variable rate of around 6.75% is the new “new neutral” setting and at a level that is only “just starting to become stimulatory”.

He expects the banks to pass on around 20 out of the 25 basis points on offer following Tuesday’s cash rate cut to 3.25%, which would take the average standard variable rate to 6.6%.

“In the last two easing cycles the mortgage rate had to fall to around 6.05% in 2002 and to 5.8% in 2009.

“Given the fall in the likely neutral level for mortgage rates and the current headwinds coming in the form of the strong Australian dollar and fiscal tightening, mortgage rates will at least need to fall to these lows.

“Given the ongoing issues with bank funding, to achieve a circa 6% mortgage rate the cash rate will need to fall to around 2.5%” he says.

This is because banks have not passed on past rate cuts in full due to “funding issues”.

“Basically banks have been seeking to reduce their reliance on non-deposit funding which has proved unreliable since the GFC and to do this they have had to offer higher deposit rates relative to the cash rate than would normally be the case.

“This has resulted in higher lending rates relative to the cash rate than was the case pre GFC.”

Oliver says the RBA is “coming around to this view”.

“As such we expect another 0.25% cash rate cut next month on Melbourne Cup day, followed by a cut to 2.5% in the March quarter next year,” Oliver says.

Oliver says key sectors likely to benefit from lower rates are retailers, building materials and home builders.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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