Despite all the speculation, the Reserve Bank of Australia (RBA) has decided to leave the official cash rate as it is at 2.25%. 'Growth in the global economy continued at a moderate pace in 2014,' says Glenn Stevens, Governor of the RBA. 'A similar performance is expected by most observers in 2015, with the US economy continuing to strengthen, even as China’s growth slows a little from last year’s outcome.' 'Commodity prices have declined over the past year, in some cases sharply. The price of oil in particular has fallen significantly. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates.' Predictions for a rate cut from finder.com.au's 37 leading experts and economists have been increasing since the last week with new data released from the Australian Bureau of Statistics (ABS). Key points from December estimate that capital expenditure fell 0.8% while the seasonally adjusted estimate fell 2.2%. Our economists were split on their forecasts for the 3 March 2015 board meeting. More than half (57%) expected the cash rate to hold while 16 experts (43%) incorrectly bet on a cut.
Out of the major four banks, economists from ANZ, Commonwealth Bank and Westpac all expected the cash rate to fall, while NAB’s Chief Economist, Alan Oster, forecasted no change stating that 'it will take some time to see the impact of the February cut.'
Of those who are expecting a cash rate cut on Tuesday, issues impacting their decisions include:
- More pressure on the Australian Dollar to depreciate
- A weaker than expected domestic and global economic outlook
- Rising unemployment and
- More than one cash rate cut being needed to stimulate the economy.
A second RBA cash rate cut in two months?
Bill Evans, Chief Economist at Westpac was one of the two experts who had correctly said that the RBA would be cutting the official cash rate in February. His bet for March was that rates would be cut again. 'A key issue is whether the Bank sees adverse development as reason to further downgrade its already pessimistic outlook for the labour market or is inclined to dismiss it as one month volatility. A major cost in delaying the next move is that the Australian dollar might start responding to a benign rates outlook.' 'Another key point is that the reasons given by the Bank in its recent communications, including the minutes, justify more than one move in total: restrained pace of wage increases, low rates of inflation likely to be sustained, a lower exchange rate was likely to be needed, fewer indications of near term strengthening in growth than previous forecasts would have implied, unemployment rate likely to peak a little (and later) than in the previous forecast.' For the economists and commentators who correctly expected the cash rate to remain on hold at 2.25% today, they predominantly believed the latest cash rate cut earlier in February required more time to filter through the economy before the Reserve Bank decided to cut again. 'We think that the RBA will still want to give the economy more support, but it will prefer to wait at this meeting so it can assess developments, particularly the currency and housing markets,' says Janu Chan, Senior Economist at St.George. 'The RBA may also want to wait to see how the economy reacts to the rate cut in February first before cutting again. A rate cut over the next few meetings remains possible. Capex data released next Thursday could be critical to the RBA's decision in March.'Back to top
What does the rate hold mean for property?
Despite the key topic of our elastic housing market, lower than average interest rates have meant lower borrowing costs. With Australia's housing boom nearly spinning out of control, the question is whether the opportunity for first home buyers will ever come. 'It’s going to be one of the toughest years yet for first home buyers,' says Michelle Hutchison, Money Expert at finder.com.au.
Our experts are expecting property prices to increase as a result of the rate cut, increasing the demand of property. But since rates are holding steady for now, first home buyers still have a chance to get their foot in the door.
First home buyers will need to work harder to jump onto the property ladder this year, with fewer first home buyers expected to enter the market.
'In fact, finder.com.au estimates that we will see just over 92,000 first home buyers this year, which will be the third consecutive year that first home buyer numbers have declined. Last year there were 94,571 first home buyer home loans financed in Australia, down from 98,217 in 2013 and close to 100,000 in 2012.'Back to top
What does the future hold?
According to the finder.com.au RBA Expert Survey, the cash rate is likely to start rising by June 2016, and climb up to 3.50 percent at the peak of the next cycle, based on the average forecasts. The majority (69%) of the 35 who responded to this question are expecting the cash rate to reach between 3 and 4%, while 14% of these respondents expect the cash rate to peak above 4%.