How low can the RBA go?

Property investors and homeowners rejoiced when the Reserve Bank made the decision to cut interest rates once more at their October meeting, bringing the official cash rate down to 3.25 per cent.

According to a Property Observer article, the good news is not over yet for those of us with mortgages, as many are predicting a further 25 basis point reduction when the RBA convenes on Cup Day.

HSBC Australia chief economist Paul Bloxham is among experts who are forecasting one more cut in either November or December before the central bank holds firm over the first six months of 2013.

He says the rise in unemployment levels to a 30-month high of 5.4 per cent in September, along with weak growth in employment (0.5 per cent year on year) and aggregate hours worked (0.3 per cent year on year) will combine to force the RBA’s hand before Christmas.

“A looser labour market should see less pressure on locally produced inflation and leave the RBA with a bit more room to move on monetary policy,” says Bloxham.

“We now expect the RBA will cut rates by a further 25 basis points before year-end.”

RBA will take the brakes off

Although the Reserve Bank has every reason to consider another rate cut before the end of 2012, Bloxham says the brakes will come off as we enter the new year, and start to see the effects of their current monetary policy and the predicted pick up in China.

The current low cash rate is slowly enticing homebuyers and investors back into the housing market, which many experts suggest will cause prices to improve in 2013.

Then there’s talk about China having neared the bottom of its cyclical slowdown and once again emerging as an economic force to be reckoned with next year.

“There are also signs that previous rate cuts are starting to support the economy,” says Bloxham.

“Housing prices have lifted in the past few months and business credit has started to grow.

“Concerns that low interest rates may overly stimulate the housing market and see an excessive pick up in already high Australian housing prices may constrain the RBA’s willingness of cut rates too much further.

“We still think too much is priced in over the next year (85 basis points in rate cuts).

“Globally, we expect China’s cyclical slowdown to bottom in coming months and for growth to pick up in early 2013. The recent bounce in the iron spot price from lows of $86 a tonne in early September to $117 a tonne today may be a precursor to a further recovery in Chinese economic activity,” he says.

What about the latest inflation figures?

In a recent blog economist Christopher Joye wrote that Westpac’s Bill Evans plus 19 other economists are still expecting a  rate cut. He went on to say”

Most economists were expecting a very weak core inflation result for the September quarter. Instead, the weighted median printed at 0.8%, the trimmed mean came in at 0.7%, and the CPI ex volatile items was a very high 1.3%. Carbon effects were arguably much lower than the RBA and Treasury were anticipating, although we will never really know.

To make matters worse, the second quarter trimmed mean and weighted median revised up to 0.6% and 0.7%, respectively. In year-ended terms, the weighted median and trimmed mean, even with the new CPI method (including new seasonal adjustments and expenditure class weights) have now been revised up to 2.6% and 2.4%, respectively. Did somebody say Australia had really low underlying inflation? If they did, they were wrong.

Notwithstanding the above, and a recent slump in market pricing for a November rate cut from a confident 85% to a coin toss, Westpac and UBS have retained their cut call alongside 18 other economists polled by Bloomberg on Friday. I note that many economists changed their October call from no move to a cut after a clear signal from media commentators in early September.

Following the upside inflation surprise, ANZ, Barclays, Citigroup, TDS, Capital Economics, Goldman Sachs, and JP Morgan are now are predicting no move in November. This makes sense to me given the RBA has already pre-emptively cut 100 basis points since May, partly on the basis of the questionable supposition that core inflation in Australia was going to be very benign.

We now have a large amount of monetary stimulus just starting to work its way through the economy with core inflation over the last six months having been officially expanding in the top half of the RBA’s target band. As I’ve predicted several times here before, the rebound in core inflation has been correlated with a bounce back in tradeables inflation as the Aussie dollar has stopped appreciating.

What stimulus, some might say?

Last week UBank dropped their 3-year fixed-rate home loan to just 5.13% pa. UBank’s one year fixed rate is merely 5.03%. CBA has slashed their 3 year rate to a 22 year low of 5.39%.

Savings rates are also falling through the floor. UBank’s bonus rate savings product dropped from 5.46% to 5.16% last week. And note this is tricky: you must have less than $200k in the account, and must deposit $200 extra cash every month, otherwise your rate falls to 4.46% pa.

Before the October rate cut, the RBA reported that the average bank deposit rate across all products was 3.7%. I would hazard a guess the average rate is around 3.4% today.

What do you think will happen to interest rates?

Leave your comment below.



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'How low can the RBA go?' have 1 comment


    October 29, 2012 Chris

    I don’t think that rates will drop too much further but perhaps stay low for an extended period of time instead. While there are reports of suburbs increasing in value, it is not anywhere near across the board. Even the ‘Top 100’ have growth of well under 20% from stagnant/negative multiple years growth. While the numerical value may be quite impressive, you need to consider what your finding the percentage of. A large percentage of a small number is still a small amount. All things in persepctive. Long term slower stimulation across the board will change people’s attitudes.


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