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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 5 May 2015

Reserve cuts to 2 per cent

Rates cut again

In the end the Reserve Bank did cut the cash rate as expected by markets to just 2 percent today.

With inflation under control and the economy growing at a below trend pace, this is the outcome that one would typically expect.

Unemployment declined in the last month of reported data to 6.1 per cent, but the trend has been steadily up over time, and consequently a cut is welcomed.

Cash rate heavy lifting

The lowering of the cash rate is likely to be good news for the economy (although horrible news for savers), and the lower cash rate is probably "positive" news for asset valuations too...if higher is indeed seen to be positive.

Share markets had mostly priced in the event and closed more or less stone dead flat.

Property markets are far more illiquid, and the impact of the cut will take its time to flow through.

It is sometimes said that property markets don't react to rate cuts - they do, of course, but not always in the manner which one might expect.

With most Australians having previously opted for variable rate mortgages, sentiment is sensitive to shifts in borrowing rates.

The old line usually goes something like "is $75/month off a mortgage really going to make any difference?".

The answer is that if interest rates only stayed 25 basis points (bps) lower for one month, then no, obviously not.

However, central banks are rarely in the habit of hiking interest rates immediately after cutting them, and the direction of today's move is significant for borrowers and their level of confidence in household finances.

Moreover, if a "neutral" cash rate is still said to be somewhere around the 3.50 percent range (it could now be lower still) we are now the equivalent of fully six 25bps interest rate hikes away from that level. 

For the record futures markets are pricing a cash rate of 2 per cent all the way out until the end of 2016 - in other words, not even pricing in one hike, let alone half a dozen.

This latest cut will also mean that fixed rate mortgage products will become increasingly available with a "3 handle", which means a "positive cash flow" can easily be found on investment properties.

If that doesn't bring more investors into the market then I will eat my hat.

The statement

The statement from Governor Stevens unsurprisingly noted the impact of declining commodity prices over the past year. 

Hearteningly the Reserve Bank does recognise some signals of stronger employment growth of late, with inflation remaining in check.

The most interesting aspect of the release for mine was that the line on capital expenditure was really stepped up to acknowledge a likely weakness in the mining and non-mining sectors over the coming year. 

Not exactly new information, one would have thought - given that the latest ABS data was released many weeks ago - suggesting that the Central Bank has conducted more detailed liaison in this area since and didn't particularly like what it found.

The wrap

Overall it was good to see a response from the Reserve to the dimmer outlook for economic growth, resulting in a cut to the cash rate to just 2 per cent.

From a real estate market perspective investor activity will only ramp up from here if left unchecked, and the regulator will need to keep a close eye on careless lending.

The rate cut is likely to be good news for property owners in the three most populous capital cities, and possible for those in Adelaide and Hobart too. 

Property markets elsewhere remain far more mixed.