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Mortgage Choice chief executive John Flavell says the Reserve Bank of Australia was left with “no choice” but to cut the official cash rate at yesterday’s monthly board meeting.
Despite 96 per cent of leading economists and commentators predicting another standstill, according to a finder.com.au survey, the RBA decided to cut the official cash rate to 1.75 per cent – the first move since May 2015.
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Mr Flavell said “less than impressive” economic data provided the RBA with the incentive they needed to cut the cash rate.
“Data from the Australian Bureau of Statistics found CPI (consumer price index) fell 0.2 per cent over the March quarter, pushing core inflation down to 1.6 per cent, well below the Reserve Bank’s target range of 2-3 per cent,” Mr Flavell said.
“This was the first time since 2008 that we have actually seen a quarterly deflation result. Furthermore, the 0.2 per cent drop in CPI was a far cry from the 0.2 per cent rise that economists were expecting.”
Mr Flavell said the surprising drop in CPI, together with the 4.0 per cent fall in consumer sentiment, forced the RBA’s move.
“According to the latest Westpac-Melbourne Institute of Consumer Sentiment, confidence fell 4.0 per cent to the point where pessimists now significantly outnumber optimists,” he said.
“Knowing this, it seemed the Reserve Bank had no choice but to cut the cash rate.”
However, CoreLogic RP Data research analyst Cameron Kusher believes the decision could have gone either way.
“The RBA’s decision to cut the cash rate to a new historic low of 1.75 per cent was likely to be hotly debated,” Mr Kusher said.
“On one hand, we have economic growth tracking at 3.0 per cent per annum, a housing market where the pace of capital gains is moderating in a controlled fashion and relatively strong labour market conditions.
“Balance this with negative quarterly inflation and a high Australian dollar and it becomes clear that this decision probably could have gone either way.”
Mr Kusher said the big question now was how much of the lower cash rate would be passed on to mortgage rates by the banks.
“The spread between the cash rate and standard discounted mortgage rate has been widening since 2008 when there was 1.8 percentage points difference between the two rates,” he said.
“By April 2016, the spread has doubled to be 3.65 percentage points and is likely to widen further if the full rate cut isn’t passed on by lenders to mortgage rates.
“With home values still showing some upwards momentum, lower mortgage rates are likely to provide some further stimulus to the housing market, which the Reserve Bank will be monitoring closely.”
