RBA interest rate cut is now a must

With underlying inflation figures coming in considerably lower than expected at 0.35% for the quarter and 2.15% for the year, the lowest in 13 years, the Reserve Bank will have little choice but to cut the cash interest rate at their up-coming May meeting.

I have said it back in February, that a further cut should have taken place, followed by another in March and April.

Bringing the interest rate down would have cemented consumer confidence, increase spending and motivated property market activity, I think the RBA got it wrong.

With the consumer price index moving up by just 0.1% for the first three months of 2012 and 1.6% for the year until March, the lowest since the 2009 GFC, the RBA’s decision should not be whether to reduce the rate, but by how much.

While lifting CPI prices on services such as electricity, childcare and water/sewerage, all over 9% increase, place extra pressure on consumers, a considerable interest rate cut would not only ease the situation, but improve consumer confidence, especially in view of the pending introduction of the carbon tax in July.

Since failing to cut the interest rate at recent RBA meetings, I anticipate cuts of up to 1% over the coming few months, which, if passed on by the banks and lenders, would make a considerable difference to existing borrowers and encourage first home buyers into the market.

If the RBA were to reduce the cash rate to 3.25% and banks did pass this fully onto consumers, on a $300,000 mortgage the reduction in repayments would be $250 per month. Surely, this would enhance construction, retail and property sector activity, providing a much-needed boost to our economy.

Robert Projeski is a leading property finance expert and the founder and managing director of Australian Mortgage Options. He has appeared on radio and TV and written extensively on property and finance matters.