Deflation sparks May rate cut propsect: ratecity.com.au

Official interest rates are poised to hit a new historic low of 1.75 percent when the Reserve Bank Board meet later today following last week's shock consumer price index results.

Property website RateCity.com.au have suggested that deflation has sparked the May rate cut prospect.

Their analysis of the national and international economic indicators shows that the disappointing inflation figures could be enough to disrupt the RBA's year-long holding pattern.

RateCity.com.au money editor Sally Tindall said the chances of a budget-day cut were over 50 percent.

“Australians should get set for a rate cut, if not this month then within the following two months,” she said.

“The RBA has held an easing bias since October. Last week’s inflation figures should be the final straw.

“Inflation is now at 1.3 per cent and core inflation at 1.55 per cent, which is undeniably well below the RBA’s own target rate – a fact they will find hard to ignore.

“Despite a last-minute plunge, the relatively high dollar will also add to the RBA’s woes,” she said.

“If the RBA does deliver a cut, the big question for mortgage holders on Tuesday won’t be around the budget, but rather whether their bank will pass this savings on.”

“But with the cash rate decision set to be announced hours before Scott Morrison delivers his first Federal Budget and employment figures still holding up, the RBA may opt to wait and see if there’s a post-budget bounce in confidence.” 

Click here to enlarge RateCity.com.au's Rateulator

Fellow mortgage website finder.com.au however have suggested that the cash rate will complete 12 months without movement as 96 percent of leading economists and experts have widely tipped the rate will hold at 2 percent.

The rate last moved in May when the Reserve Bank cut by 0.25 percent.

27 of 28 experts who took part in the finder.com.au Reserve Bank Survey believed the pause will continue due to a robust labour market, recovering Australian dollar and imminent Federal Budget.

CommSec's Savanth Sebastian is the only economist who has predicted a cut, suggesting the low inflation results opens the door for the Reserve Bank to cut rates if they deem it's necessary. 

As for prospects of a rate movement beyond May, 55 percent of the 22 experts who opted in to this question predict a fall is on the cards in 2016, with the most popular months indicated for a cut being August (four predictions) and November (3). 

Conversely, three experts – Steven Pambris from Bank of Sydney, Mark Crosby from Melbourne Business School and Stephen Koukoulas from Market Economics – predict a rate rise, or multiple rises, this year. 

Ten experts (45 percent) predict no movement until 2017. All of this group agreed that a rate rise was the next likely move. 

Half of the 24 experts surveyed on the rate cycle thought that the cash rate has already hit rock bottom, and would not drop below 2.00 percent in this period. Nine experts (38 percent) predict a drop to 1.75 percent before a rise, while only three experts (13 percent) predict a drop to 1.5 percent.

Twenty-two experts weighed into whether recently reported oversupply of units in capital cities would have an effect on property prices. Eighty-two percent predict this would lead to a drop in unit prices in capital cities, with 36% (8) forecasting growth will slow across the whole capital city property market. Only four economists (18 percent) predict no effect on property prices. 

Bessie Hassan, Money Expert at finder.com.au, says these findings, coupled with recent news that three of the big four banks – Westpac, ANZ and Commonwealth Bank – have ceased lending to foreign investors, could pave the way for first home buyers to enter the property market. 

“Foreign investors account for nearly nine percent of housing sales, so this crackdown could take the heat out of the property market. If you’re a first home buyer and have a deposit saved up, now may be the best time to nab a bargain, especially if you’re eyeing an apartment. 

“First home buyers have had an even tougher time of late, so this will be welcome news. Figures from the Australian Bureau of Statistics show that the number of first home buyers has been dropping consistency since September 2012, when it peaked at 19 percent. The latest figures show first home buyers now account for just 13.4 percent of all home loans financed. 

“However, with the cash rate looking likely to remain stable for the foreseeable future, signs are pointing to a long-awaited first home buyer ‘comeback’," says Ms Hassan.

“Interestingly, should the cash rate hold on Tuesday as widely expected, RBA figures show this would be only the third time in a decade that the official cash rate has held at the same level for 12 months or more.

“That said, the average standard variable home loan rate – currently 5.21 percent – is not expected to hold for much longer with the big four banks having not moved their variable rates in five months. 

“This reiterates that shopping around for the best home loan deal has never been more important. Do your homework, compare lenders, read the fine print and always factor in a buffer of 2-3 percent in case of future rate rises so you’re not left with a nasty shock soon after becoming a homeowner."