Cuts give economy a spark
IT’S time for a game of interest rate limbo. So turn on that funky music and ask yourself the question: ‘‘How low can they go?’’ Firstly, you can forget about lowering the bar at next Tuesday’s Reserve Bank board meeting, economists say.
The RBA signalled this month that it is in wait-and-see mode on the rate-cut front, although many economists expect it to drop them further in the coming months.
Our record low official interest rate of 2.5 per cent has been fuelling stronger activity in the residential housing market and also boosted share prices of companies that pay high dividends, which are now much more attractive than holding cash in the bank.
Real estate buyers may love low rates, but retirees with savings accounts hate them.
Low rates have also assisted the Australian dollar’s recent fall, which has been welcomed by exporters and tourism operators, but not travellers heading overseas.
In a nutshell, low interest rates lead to winners and losers. If you’re reading this, chances are you’re in the winners’ group. Yay for you!
But back to our limbo question: Will they continue falling and by how much?
Short answer: Probably, and how long is a piece of string?
Opinion is divided about just how many more cuts will be needed to give the economy some spark.
The general belief is for one more cut in the coming months, but some say we could see another 1.5 percentage point drop. For that to happen, we would need an economic or financial disaster to occur. And if inflation picks up quickly, expect the RBA to change tack and begin rate rises.
CommSec believes interest rates are likely to remain low for an extended period because of a sluggish local economy and the risks on global financial markets. It reckons rates will be on hold for the next few months. Westpac has forecast a cut in November and another early next year, while AMP Capital also thinks there is a chance they will fall further. The general consensus seems to be for one or two more cuts.
It appears that nobody is predicting interest rates will rise in the next year, and that’s good news for real estate buyers.