The Australian property market breathed a little sigh of relief when the RBA cut interest rates this month, and for most people they felt it was a positive step, however there is a strong argument why that cut won't be the last rate cut we see this year. Could it be that after not seeing any change in interest rates since August 2013, we will see more than one in a short period of time? Here are five reasons why:
1. Cuts to date haven't kick started growth: The RBA released a statement that there have been few indications of a strengthening in the growth of the economy than what forecasts had suggested" - The RBA seem to be focused on getting us to that level of a more strengthened and robust economy, and to encourage spending and ease pressure, another cut may assist.
2. The forecast growth hasn't happened: The market needs to adjust when it doesn't get the results they expect. The economy growth has been downgraded from 2.5% to 3.5% in 2015 to 2.25% to 3.25% in 2015, meaning that the over estimation needs to be corrected. To put the economy in line more with that growth level a cut would be appropriate.
3. The economy needs to find a way to generate consumer spending: It seems that Australian's have gone in to their box and are not spending at the levels the RBA would like. Confidence is down and people are focused on eradicating debt rather than spending for the economy, to get them interested in spending again it needs to be very attractive. The only way consumer spending can be encouraged is by people having to contribute less to debt, which is what decreasing interest rates will do.
4. Unemployment could rise: The RBA predicts that there could be a rise in unemployment and if that is the case, then it makes logical sense for another interest rate cut. This will dry up demand for consumer spending to purchase assets and supposedly push prices lower (this can be countered however if more investors try to snap up homes) This, coupled with consumer confidence being the lowest it has been in over 12 months means an interest rate cut could be the only increase to consumer confidence.
5. GDP levels aren't where they should be: Unfortunately the level of GDP forecasts aren't going to reach where they should have, which again will set consumers up for a let down. Australian GDP was expected to sustain at levels between 2 and 3 percent this year, and that is already forecast to be down 0.25% - with the GDP down it is a strong indication the economy is not where it needs to be, and to get it where it needs to be it needs to find a way to encourage spending.
It seems the Australian economy may be in for a quieter 2015 which is more subdued than initially anticipated. Another interest rate cut will put levels at the lowest that they have been in a very long time, and be the one thing that attempts to kick start the economy. The RBA needs to be careful that it does look at other alternatives as cutting interest rates may only be fixing symptoms and not the real problem.
About the Author:
Todd Schulberg handles all things marketing for Homely.com.au - Living and breathing property, Todd has a keen interest in the movements in the market and how agents can utilise new tools and technology in order to be more connected. Using all things social, Todd suggests different ways that agents can engage and think outside the square with their marketing approach.