Property and retail sectors hail rate cut – but just how low can rates go?

The Reserve Bank of Australia’s decision to cut rates by 1% yesterday has been welcomed by business groups, with the property and retail sectors confident that the cuts can provide their industries with a much-needed spark.

The Reserve Bank of Australia’s decision to cut rates by 1% yesterday has been welcomed by business groups, with the property and retail sectors confident that the cuts can provide their industries with a much-needed spark.

The RBA has now slashed 3% from the official cash rate in the past three months, taking the rate to 4.25% – the lowest point since May 2002. Happily, the big banks have passed on most of the cut already, with Commonwealth and NAB passing on the full 1% cut.

Chris Lamont, chief executive of policy at the Housing Industry Association, says the rate cuts combined with increases to the First Home Owners’ Grant have opened up the market to first home buyers.

“We are seeing a new group of first home buyers. These are people in their 30s and 40s who are looking to take advantage of the interest rate cycle and the boost to FHOG,” Lamont says.

The HIA says the 1% rate cut translates into an additional saving of $204 per month on a $300,000 mortgage, or over $2450 a year.

The executive director of the Australian Retailers Association, Richard Evans, hopes the latest cut will help turn consumer confidence around after successive months of stagnant spending and declining growth.

“This fourth successive rate cut will be a shot in the arm for consumer confidence and will be seen in the market around May/June next year – just when ARA modelling indicates growth will return,” Evans says.

The RBA’s dramatic rate slashing routine is part of a desperate attempt to shield the Australian economy from recession – or at least cushion the blow as the economy slows further. But economists are now asking – just how low can rates go?

Westpac chief economist Bill Evans had been predicting rates will be cut to 3.5% during early 2009. Now he’s wondering if the RBA could go even lower.

“Prior to yesterday’s move, we had anticipated the low point in the cycle to be 3.5%, and while we feel confident of a 50 basis point cut in February, the risks thereafter must be for the low point to be even less than the 3.5%.”

JPMorgan chief economist Stephen Walters is predicting a 50 basis point rate cut in February (there is no RBA meeting scheduled for January) and a final 25 basis point rate cut in March.

“These moves will take the cash rate target down to our expected terminal rate of 3.5%, one month earlier than we thought previously. This will be the lowest target rate on record.”

CommSec chief equities economist Craig James also has a 50 basis point rate cut pencilled in for February – he believes the RBA is giving “veiled warnings that it has done enough” by cutting so hard.

“The Reserve Bank is clearly front-loading stimulus on the hope that it will chase away recession fears and boost activity.

“In six months time, the significant stimulus could prove to be excessive, but when you are in the eye of the storm you have to do what it takes.”

Is your business starting to feel conditions easing? Are the rate cuts having an affect on your market? Send your thoughts to feedback@smartcompany.com.au