Cash rate to fall to 2.5% as housing and other non-mining sectors fail to pick-up “quickly enough”: Shane Oliver

AMP Capital chief economist Shane Oliver is tipping the cash rate to fall to 2.5% noting that the housing market in particular has failed to respond to rate cuts in the manner it has done in previous easing cycles.

Figures compiled by Oliver show that house prices, building approvals, retail sales and employment growth have responded in a "modest" manner to the current easing cycle 18 months on from the first rate cut in November 2011 in comparison with much swifter responses to previous easing cycles  in 1996, 2001 and 2008 over the same time frame.

As the table below shows, home prices are currently up just 1.9% since November 2011.

This compares with an 18% increase in house prices 18 months after the RBA cut the cash rate by 50 basis points in July 1996.

They were up 30% a year-and-a-half after the start of 2001 easing cycle and 11% a year-and-a-half after the big GFC easing cycle started in September 2008.

Key variables, 18 months into rate cutting cycles


July 1996

Feb 2001

Sept 2008



NAB biz confidence,

index level






Consumer conf, index level






Retail sales, % gain since first cut






Home approvals, % gain since first cut






Auction clear rate, % – Syd, 4 wk avg






Auction clear rate, % – Melb, 4 wk avg






Home prices, % gain since first cut






Employment, % gain since first cut






Private credit, % gain since first cut






Source: NAB; Westpac/Melbourne Institute; ABS; Australian Property Monitors; RP Data/Rismark, RBA, AMP Capital 

“The basic issue in Australia is that the slowdown in mining investment growth is now looming and we need to see a pick-up in non-mining activity to fill the gap in terms of the contribution to GDP growth,” says Oliver. 

“While this was never expected to occur smoothly, the evidence to date points in the direction of non-mining activity not picking up quickly enough.

To be sure interest rate cuts have got some traction: the home buyer market has improved with increased sales, auction clearances and house prices, consumer confidence is up and retail sales are up. 

“But the response has been tentative and weak. 

“Apart from auction clearance rates, which look solid, all of these indicators are currently below the average level they attained this far into past easing cycles. 

“Importantly, he points out that while consumer confidence has picked up, business confidence remains subdued. 

“Retail sales picked up in January and February but the level of sales is still well below where it would normally be this far into an easing.

“It’s the same story with dwelling approvals which are off their lows but haven’t seen the average 38% gain they would have normally seen by now. 

“Employment growth is also lagging,” he says.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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