‘RBA will cut again,’ says economist

‘RBA will cut again,’ says economist



A leading Australian economist has predicted that the Reserve Bank of Australia will “reluctantly” cut interest rates next year, due to concern over house prices.

There has been ongoing speculation that the cash rate could rise next year, following on from four months of record-low interest levels (of 1.50 per cent). However, Stephen Koukoulas, former chief economist of Citibank and senior economic adviser to the Australian Prime Minister, told Mortgage Business he believes that there will have to be another cut next year.

Mr Koukoulas commented, “I think the RBA will cut again, reluctantly, because they're worried about house prices, particularly in Sydney and Melbourne [where median house prices are at record highs of $1.06 million and $770,000 respectively].

“I think, maybe early in the New Year (if we get another low inflation result at the end of January), if the labour market remains sluggish, the risk reward for the RBA is just to trim rates a little more, which might take a little bit of heat out of the Aussie dollar.”

He added that he believed the Reserve Bank should have cut rates earlier, to free up cash flow for both businesses and “indebted households”, who are increasingly struggling to meet mortgage repayments.

The comments from the Market Economics managing director echo those of AMP Capital chief economist Shane Oliver, who recently suggested that it was still “way too early” to rule out further rate cuts next year.

Like Mr Koukoulas, Mr Oliver stated that he was “allowing for one rate cut in the first half of next year”, adding that “regardless of whether there will be further cuts or not, a rate hike remains a 2018 story at the earliest”.

Both economists also highlighted that mortgages could come under the microscope next year, with Mr Koukoulas suggesting that the RBA may be tempted to “lean on the regulators” so that they’re more “careful in how much they're lending for the housing market”, while AMP’s economist said that the Reserve Bank “may also need to offset increases in bank mortgage rates that are being driven by the rise in global bond yields”.

Their comments come after a recent RateCity.com.au analysis of more than 30 key economic indicators suggested that the Reserve Bank’s easing cycle had ended, and the likelihood of a rate hike next year was mounting.

“Australians should get ready for rates to go up next year to cool our hot housing market,” RateCity.com.au data insights director Peter Arnold said.

Mr Arnold noted banks have already started moving their fixed rates higher, with Westpac the first major to do so.

“With that, many lenders [are] moving fixed rates up. It’s the best sign that we have that a variable hike is on the way,” he said.

Mr Arnold pointed to findings from international forecasters, namely the OECD, which said that rate hikes were needed to “unwind tensions from the low-interest environment, notably in the housing markets”.

‘RBA will cut again,’ says economist
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