Interest rates to fall - and keep falling

AUSTRALIANS can expect a series of rate cuts, beginning with a drop of at least 0.25 points at the Reserve Bank board meeting next Tuesday, after much weaker than expected inflation figures.

The consumer price index climbed just 0.1 per cent in the first three months of the year, and by just 1.6 per cent over the year to March - the weakest annual price growth since the 2009 global financial crisis. This is a sign that both inflation and economic growth are weaker than the Reserve had expected.

More rate cuts are likely to follow in response to a tough budget which will tend to further dampen economic activity in the quest for a surplus.

Debate at Tuesday's meeting will be about whether to cut the cash rate by 0.25 or 0.50 points.

Lower interest rates and easing cost of living pressures could take some sting out of the unpopular carbon tax, to be introduced in July.

Pushing down prices was a 60 per cent drop in the price of bananas in the quarter and a 30 per cent fall in the price of fruit. Over the year to March fruit prices fell 24 per cent and vegetable prices 17 per cent.

Even ignoring the price of volatile items such as fruit and vegetables, inflation is weak. The Reserve's measure of so-called underlying inflation came in at an extraordinarily low 0.35 per cent for the quarter and 2.15 per cent for the year. The annual figure is the lowest in 13 years.

"The Reserve Bank got it wrong," said Stephen Koukoulas, an economic consultant who was until recently an adviser to the Prime Minister.

"They should have cut in February, they should have cut in April. Even as late as last year they were expecting inflation above 3 per cent. It is now clear they underestimated the impact of the strong dollar and failed to appreciate how weak retailing and construction really were."

The Treasurer, Wayne Swan, said while the Reserve Bank was independent, "you would only have to look at their minutes published a week or two ago to see that they themselves have said that they'll be looking closely at this inflation number, and they will do that and take their decision independently".

The bank said if inflation eased further "a case could be made for a further easing of monetary policy".

Financial markets were last night pricing in four more cuts of 0.25 per cent by Melbourne Cup day, taking the Reserve Bank cash rate down from 4.25 per cent to 3.25 per cent. If fully passed on they would bring down standard variable mortgage rates from around 7.4 per cent to 6.4 per cent. This would cut $190 a month from the cost of servicing a $300,000 mortgage, taking monthly payments below $2000.

Attempts to make political capital of the Reserve's deliberations turned to farce yesterday when the Opposition Leader, Tony Abbott, wondered out loud whether the bank would "lower interest rates today", apparently unaware the bank board wasn't meeting until next Tuesday. The Financial Services Minister, Bill Shorten, pounced, saying anyone who wanted to be the alternative prime minister ought to know when the bank board met.

"The Reserve Bank board has been meeting on the second Tuesday of the month since 1960," he told the ABC's PM program. Mr Shorten was also wrong. The board meets on the first Tuesday of the month.

Source: Brisbane Times

House sellers hope rate cut flushes out buyers

REAL estate agents and vendors are hoping the prospect of interest rate cuts brings out the buyers on Saturday after a ''patchy'' few months.

A series of rate cuts - as many as four by Melbourne Cup day - are now expected, which could cut the cost of servicing a $300,000 mortgage by $190 a month. A drop of 0.25 per cent or even 0.50 per cent is likely on Tuesday when the Reserve Bank meets.

The chief executive of Raine & Horne, Angus Raine, said the year had started with ''plenty of promise'', but real estate markets across Sydney ''have plateaued'' since February when banks started increasing rates independently of the RBA.

Sales volumes are certainly down. Australian Property Monitors expects final figures to show a drop of close to 8 per cent for the March quarter, compared with the same period last year. Auction clearance rates, although showing signs of improvement, are also down on the start of last year.

In the inner-west Poh Ling Ee of Ee Real Estate described the market as ''patchy''.

She's just exchanged on a two-bedroom house on a tiny block in Newtown for $910,000 that last traded for $795,000.

''That house had wow factor,'' Ms Poh Ling said.

''But generally, the little ones are selling, the one beds and the two beds … but many of the big houses don't even have one bid.''

She said an interest rate cut was needed to restore confidence and a principal at BresicWhitney, Ivan Bresic, agreed. ''I suspect that we will see a few more buyers around on Saturday,'' he said.

His colleague, Ercan Ersan, has 10 contracts out to first-home buyers for a two-bedroom apartment in Pitt Street, Redfern, and is confident of a sale. ''I expect to have between three and five buyers at the auction; most auctions these days have one or two,'' he said.

Skye Healey Ward, 30, who owns the apartment with her husband, Benjamin, 37, hopes the news of rate cuts will make buyers dig deeper. ''It might increase the amount that people are prepared to pay for the property … it could be an extra $10,000 or $20,000,'' she said.

Laura Gregorace, 28, was equally enthusiastic about selling her two-bedroom investment apartment in Livingstone Road, Marrickville, which she owns with her husband, Philip, 29, on Saturday. ''I think it's great news [about the likely interest rate cuts]. Hopefully more people will turn up,'' she said. Her agent, Vittoria Pizzolato, from Callagher, was even more upbeat: ''I'm expecting some confident bidding,'' she said.

SMH

Agents, vendors hold breath for buyers to brave unchanged lending rates

THE Reserve Bank's decision not to cut interest rates has dealt a blow to the confidence of buyers and smothered a real estate market that was in the tentative stages of a recovery, agents warn.

From the eastern suburbs out to the west, agents had started the year with a spring in their step, fielding more inquiries and selling more houses than this time last year.

But that continued momentum is now in doubt, according to agents, who fear there will be a slower recovery.

"We need rate cuts in the eastern suburbs particularly for confidence and other parts of Sydney for mortgage payments" ... Director of BradfieldCleary, Bob Guth. Photo: Glenn Hunt

''It's disappointing,'' said Bob Guth, a director of BradfieldCleary, an agency in the eastern suburbs.

''We need rates cuts in the eastern suburbs particularly for confidence and other parts of Sydney for mortgage payments and the opportunity to borrow.''

Vendors will be anxiously waiting to see if the interest rate decision will have any impact on sales this weekend.

Alicia Walsh is desperately hoping her family's Marrickville house will sell on Saturday when it goes to auction.

''A rate cut would have helped but I think if you want to make a long-term investment, it won't stop people from buying and we have had a lot of interest and contracts taken,'' Ms Walsh said.

The president of the Real Estate Institute of Australia, Pamela Bennett, said lower inflation figures showed there was a ''clear indicator to cut rates'' and the fact those cuts were put on hold would dampen any recovery.

''We know that first home buyers are starting to return to the property market but another reduction would have assisted in stimulating the lower end of the market and provided a ripple effect to those buyers trading up,'' she said.

In Blacktown, an area with a high proportion of these buyers, agent Mark Sargent, from Starr Partners, said the decision would hurt those most vulnerable. ''We deal with a lot of first home buyers who have got to pay stamp duty now, which they didn't have to before Christmas [because of the state government grants],'' he said.

The consumer group Choice said homeowners could now consider switching lenders to get a better deal.

''This is the year of the switch but people have to be careful of leaping from the frying pan and into the fire,'' a Choice spokesman, Christopher Zinn, said.

SMH