Further cash rate cut on the horizon, says broker head

1300HomeLoan managing director John Kolenda said that while it was no surprise to see rates held at 2.0 per cent at yesterday’s meeting, the slowdown in China and the volatile share market have made it more likely that the RBA will further lower the cash rate this year.

“The RBA has a number of headwinds to negotiate this year which includes the downturn in China and instability in financial markets,” Mr Kolenda said.

“I think we are still likely to see the RBA cut rates in the first half of this year, or possibly in the second half of the year when the next federal election is scheduled.”

Mr Kolenda noted that easing by other central banks could further pressure the RBA to lower the official cash rate later in the year.

Lower rates have become “the new normal” post-GFC, and consumers are now accustomed to them and likely to be sensitive to any future rate rises, which poses a major challenge for the RBA, he said.

“The GFC has changed society, and consumers are generally more sensitive to economic conditions and interest rates movements, which the RBA hasn’t increased for more than five years,” he said.

“We have seen a dramatic change in consumer behaviour as they prefer to save money and spend wisely versus the credit spending frenzy for the decade before the GFC.”

In a statement on the central bank's decision to keep rates on hold, RBA Governor Glenn Stevens said: “The Board judged that there were reasonable prospects for continued growth in the economy, with inflation close to target. The Board therefore decided that the current setting of monetary policy remained appropriate.

“Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand.

“Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand,” he said.

[Related: RBA makes first cash rate call of 2016]