Guessing game

At a time when most Australian’s are wondering when the next rate rise will be, the announcement of a predicted cut came as somewhat of a surprise.

The prediction comes as fear mount over the European debt crisis, which Mr Evans believes will negatively affect Australian business.

Adding to Westpac’s bleak view of the economy is the bank’s July index of consumer sentiment, which fell 8.3 per cent to 92.8, its lowest level since the global financial crisis.

But these figures paint a different picture to the one outlined by the Reserve Bank back in May, which predicted growth in Australia to be relatively strong over the next few years, with the unemployment rate moving lower.

The reason for the RBA’s more optimistic view of the economy is that its economic forecast was largely driven by the success of the mining sector.

When asked why he made the prediction, Mr Evans said that, based on the international landscape, rates are too high.

“We need to get back to a level of interest rates that is more neutral for the economy,” Mr Evans says.

“I just think that the global environment is deteriorating and the domestic economy is really splitting up into this two-speed economy and interest rate sensitive parts of the economy, I believe, are indicating interest rates are too high.”

While Mr Evans does not believe that the European debt crisis will impact Australia, he does think that as the economic issues in the global environment unfold they will negatively impact Australian consumer confidence.

“It’s going to impact upon confidence and we don’t know whether it will impact upon global capital markets, but it’s my assessment of the global environment that adds to the case for lower rates,” he says.

“I think the main reason really is it relates to the weakness of the non-mining and non-agricultural sectors of the domestic economy.”

There is no doubt that a flat property market and low consumer sentiment have been the topic of discussion in recent months, but what is now up for debate is whether an interest rate cut will breathe new life back into the mortgage broking industry.

In terms of its impact on the property market, AMP chief economist Shane Oliver says a rate cut will have positive effects in the short term but will not fix the overarching issue of housing affordability.

“There’s no doubt if interest rates started to come down, then that could put a bit of life back into the residential property market,” Mr Oliver says.

“But I think that would probably turn out to be another temporary blip, like we saw with that huge surge in prices through 2009 and into early 2010, which was off the back of generational loans.

“A cut in interest rates, particularly if it’s the 100 basis points that Westpac’s been talking about, would probably put the life back into the housing market and turn price declines into price rises, but in the fundamental sense I don’t think it does anything to improve the essential lack of affordability in the Australian housing market.”

Mr Oliver says an interest rate cut of this kind would more than likely create a temporary, constrained surge in property prices.

“I think I really need to see some more information, more data over the next couple of months before I’d be confident that rates were going to come down,” Mr Oliver says.

“I think the way the global economy has been going and the way the Australian economy has been going it’s now almost a 50/50 proposition that we’ll see a rate hike or a rate cut.”