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ISCOVER
Jessica Darnbrough
The Reserve Bank’s series of 25bp rate cuts could be doing more damage than good to consumer confidence according to Residex.
According to Residex’s latest Capital City Housing Market statistics, rate reductions are not having the same impact on the housing market as they once did.
“Normally, rate reductions improve sentiment as they occur when there are issues peculiar to Australia this can be corrected by stimulation of the economy,” Residex’s John Edwards said.
“This is currently not the case as many Australian problems are caused by international issues, and the slowing of the Australian resources boom.
“Perhaps in this situation, each rate reduction simply reinforces consumer views that we are in for a tough 12 months ahead and hence they should save money and not spend. Something the press is also constantly reinforcing presently.”
According to Mr Edwards, in a situation where consumer sentiment has become a significant part of the equation and rate reductions are having minimal impact, it is important to avoid doing things that have a tendency to unsettle or reinforce the negative view of the future.
“Fewer rate reductions of a larger scale may well be more effective than a constant string of small adjustments that are constantly causing poor press about the economy,” he said.
“Should the RBA continue along the road of small reductions, there is a real risk that it will need to reduce the cash rate to 2 per cent or less. However, should it move to a much more significant reduction in February (of around 0.75 per cent), this would probably achieve its objectives and bring the cycle of small rate adjustments to an end.”
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