Rate cut will help the economy and boost confidence, say quick-draw industry players

The decision by the Reserve Bank to cut the cash rate by 0.25% on Melbourne Cup Day has been applauded by Mortgage Choice, RP Data, Ray White and the HIA, who all say it will deliver a boost to consumer confidence. The commentators all issued their views within minutes of today's rate cut announcement.

“The RBA knows times are challenging for many consumers and businesses and has reacted by reducing the interest rate restriction on the economy, to boost confidence,” says Mortgage Choice spokeswoman Kristy Sheppard.

According to Sheppard, the less restrictive rate setting should help businesses “to a position where they feel less pressure to cut employee hours and/or numbers”.

“Borrowers will be delighted, but the move probably won’t result in most heading to shops – de-leveraging and building a protective financial shield against tougher times is their focus.”

“Our national survey completed last month discovered only one in five of the respondents, all of whom were mortgage holders, would spend more if interest rates drop. In fact, over half will now contribute more into their home loan and not spend any extra,” Sheppard says.

RP Data head of research Tim Lawless says the rate cut should not come as a surprise from a housing market perspective, “considering the soft market conditions that have been evident since June last year have created no inflationary pressures”.

“In fact, capital city home values are down 3.6% from their December 2010 peak and rental rates have increased by just 4.5% over the 12 months to September.

“The improved debt servicing position will be a welcome improvement to anyone with a mortgage, however the primary benefit from the rate cut is likely to be seen in an improvement in consumer sentiment which should lead to an uplift in housing transaction volumes which are currently tracking about 13% below the five year average nationally,” he says.

Brian White, chairman of the Ray White Group, says the nation’s two-year  discussions about a possible rate increase have been “clearly been inhibiting the psyche of some potential buyers and sellers who have lacked the economic confidence to make decisions about property transactions in that period”.

"There are many people on the sideline who have been awaiting a more favourable cash rate before engaging in the market and this, in turn, has been impacting other sectors of our economy."

"It's encouraging for the RBA to recognise that people need to feel secure in their property equity in order to spend elsewhere. When an individual buys a home they are effectively embarking on a long journey with the RBA," White says.

HIA acting chief economist Andrew Harvey says the RBA made the right call for the economy.

“Both consumers and business need a shot of confidence given offshore and domestic economic circumstances. Today the RBA used the opportunity to administer that shot and it is exactly the right call.”

In his statement on the November Monetary Policy Decision, RBA governor Glenn Stevens suggested that the lower quarterly inflation figure and concerns about confidence outside the resources sector in September pushed the bank over the line:

“Over the past year, the board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation. With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2% 3% inflation over time,” Stevens said.

He also noted the moderation in the pace of global growth and the moderate expansion in the US economy, despite the fact that US economic expansion picked up in the September quarter.

Global concerns appeared to outweigh the recovery in local equity markets and the recent rise of the Australian dollar on the thinking of the RBA board.

“Equity markets have gained ground and the Australian dollar has risen significantly as risk aversion has lessened. But it is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households,” Stevens said.

“Financial conditions have been easing somewhat recently, with market interest rates declining a little and competition to lend increasing.  But overall conditions have remained tighter than normal, with borrowing rates still a little higher than average, credit growth subdued and asset prices lower than earlier in the year. The exchange rate has been very variable over the past few months, but on the whole has remained at historically high levels,” Stevens added.