December rate cut not enough

Despite the Reserve Bank's (RBA) cutting 25 basis points from the cash rate earlier this week, industry pundits are already calling for further cuts.

1300HomeLoan’s managing director John Kolenda welcomed the RBA decision, which saw the official cash rate drop by 25 basis points to three per cent, but said “more still needs to be done”.

“Let’s face it, this rate cut was an absolute no-brainer and more is going to be needed before things start to improve,” Mr Kolenda said.

“Retail and construction are continuing to flounder, the mining sector is turning down and now wages have recorded their first fall in years, so there was really no choice but to cut.

“It would have been far better if rates were cut last month to put two cuts in the lead-up to Christmas, but as usual it is too little too late from the RBA.”

Mr Kolenda’s comments were echoed by AMP chief economist, Shane Oliver, who agreed more cuts are needed to boost the non-mining sectors of the economy.

“While the RBA has cut the official cash rate back to its post-GFC record low of three per cent, overall policy settings are nowhere near as stimulatory as they were in mid-2009,” Mr Oliver said.

“Bank lending rates are much higher, the Australian dollar is way higher and fiscal policy is being tightened not loosened. As such, even lower rates will be needed to boost the non-mining sectors of the economy as the mining boom fades at a time when the Australian dollar remains strong and fiscal cutbacks are intensifying.

“Post-GFC caution has likely resulted in a reduction in the neutral level for bank lending rates, such that they are only just mildly stimulatory. Standard variable mortgage rates will need to fall to around six per cent at least, which implies that the official cash rate will need to fall to 2.5 per cent at least. This is expected to occur during the first six months of next year, with the RBA cutting again in February.”

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