Cuts give econ­omy a spark

The Advertiser - Real Estate - - Victoria St, Queenstown -

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.

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