The rates that shopped a nation
The RBA bets on a boost to consumer confidence, writes John Collett.
The RBA bets on a boost to consumer confidence, writes John Collett. This week's cut in interest rates, the first in 31 months, will be good for most investors, especially if there is a lift in the gloom emanating from overseas. Although Australian shares and property prices could benefit, those on fixed incomes from term deposits will be worse off.The Reserve Bank's interest rate cut of 0.25 of a percentage point on Melbourne Cup day was in response to what the bank called the "moderate" growth of Australia's economy.Most economists expect the bank to make one final cut early in the new year. Because of the massive investment in mining yet to come, cutting rates too much would risk a break-out of inflation.But investors might be hard-pressed to break out the champagne given global uncertainty."We have had one day of good news on the interest rate front and we are getting bad news, day after day, on Europe and the global economy and that is still weighing on people's minds," says the chief economist at AMP Capital Investors, Shane Oliver.SharesThe head of research and senior portfolio manager at Investors Mutual, Hugh Giddy, says many households are living week to week and the rate cut means they will have a bit more to spend. Consumer confidence should increase and that will be good for companies, especially retailers."However, what it does for share prices is another matter, as our sharemarket is being driven by overseas forces," Giddy says. "The interest rate cut was anticipated by the sharemarket when the inflation number came out earlier as benign."The question is whether consumers will save the rate cut, worth about $50 off monthly mortgage repayments for most people, or use the savings to pay off debt, he says.The co-founder of fund manager Eley Griffiths Group, Brian Eley, is not sure the rate cut will do anything for the sharemarket overall because it is being overshadowed by overseas events. "However, it will certainly help the retailers," he says. "This cut is the signal that consumers are looking for to re-engage and will hopefully make for a better Christmas for a lot of the retailers," Eley says. "I think that it is a bit of oxygen that they need."Oliver says that along with retailers, housing-related stocks, particularly building-materials suppliers, should benefit from the rate cut.Property pricesCapital-city property prices have been on the slide for the best part of a year. Property research group RP Data-Rismark says national prices fell for the ninth straight month in September by 0.2 per cent after falling 0.4 per cent in August.Home prices fell 0.6 per cent in September in Sydney and 0.3 per cent in Melbourne, seasonally adjusted. Sydney prices have slipped only 1.7 per cent from their peak in December last year.Potential home buyers have been cautious because of the uncertainty about the strength of the global economy, on which the Australian economy relies, and what would happen with interest rates. But can the rate cut help arrest the slide?The managing director of SQM Research, Louis Christopher, says the reasons for the slide in prices include the massive pull-forward of first-home buyers with the government incentives that ended mostly early last year, the seven interest rate hikes between October 2009 and November last year and the lack of consumer confidence.Christopher says the rate cut will restore some confidence because the property market is particularly sensitive to interest rates."It should make people more optimistic about buying property," he says. "We are very likely to see a bottom [to the price falls] next year."We do not believe that there will be a sharp rebound in prices and are expecting price rises of between 2 and 5 per cent for most capital cities."Sydney, Canberra and Perth should do a bit better, he says.Term depositsThere is one group of investors - those mostly with fixed-interest investments or cash - for whom the rate cut is not good news. A year ago, term deposits were paying about 7 per cent as institutions competed for depositers' cash. But slowing credit growth has reduced the need to raise as much cash from depositors and interest rates on the best-paying term deposits have fallen to about 5.5 to 6 per cent. The managing director of term-deposit broker The Term Deposit Shop, Grant Goodier, says it is still early days after the cut but institutions are not expected to cut their term-deposit rates by as much as the rate cut.That's because term deposits tend to be priced on the outlook for interest rates and their need to raise cash.Many institutions will already have factored in this cut. At the time of writing, major institutions were yet to change their rates."If investors believe that interest rates have further to fall, they should lock in for longer time frames," Goodier says. No one expects rates to go higher.Oliver says term deposit rates are "still reasonably attractive but I suspect that over time they will become less so as rates keep edging down."The manager of research at Canstar Cannex, Chris Groth, says there have been reductions in the at-call online saver interest rates of between 0.15 and 0.4 of a percentage point in response to the rate cut.The best online savers pay a base rate of about 5.5 per cent, with a bonus rate of another 0.5 of a percentage point if certain conditions are met.Outlook on rates - more on the horizonFinancial markets are pricing in another rate cut in December with more reductions next year in response to weaker global conditions. But economists are not so sure."On our current global forecasts we do not see further Reserve Bank cuts," the chief economist of HSBC Australia and New Zealand, Paul Bloxham, says.He says domestic conditions with Australia still facing a massive mining investment boom make it likely rates will be on hold throughout the coming year. However, with inflation contained, the bank could cut again if the global financial situation worsens, Bloxham says.The chief economist of UBS Australasia, Scott Haslem, says the recent improvement in the global and domestic data flow and better progress towards a solution to Europe's debt woes make it less likely the Reserve Bank will need to cut rates further.He is not expecting a follow-up cut in December. However, with the expectation growth has further to slow in Asia and China in the near term and the vulnerability of the European solution to the debt crisis, Haslem is forecasting an additional and final cut in the first quarter of 2012.The chief economist at AMP Capital Investors, Shane Oliver, is expecting one more cut in February or March next year. "With the bad news, globally, the odds are for another 25 percentage point cut," he says.