With the low CPI reading earlier this week, a drop in the cash rate next Tuesday is pretty much a done deal. The question is now will the RBA cut the cash rate by 25 or 50 basis points? According to financial market expectations (based on the ASX cash rate futures yield curve), the cash rate is likely to fall by 50 basis points by the June RBA meeting. In fact, the yield curve is pointing to a 100 basis point rate cut by years end.
According to the RBA, the standard variable mortgage rate at the end of March this year was 7.4%, just 6 percentage points higher than the ten year average which is 7.33%. Even if lenders don’t pass the full rate cut on (as most expect they will not), it is safe to assume that next Tuesday we will see variable mortgage rates fall below the 10 year average once again (variable mortgage rates were below average between December 2008 to April 2010, a period of significant house value appreciation).
Lower mortgage rates are certainly a positive for the housing market. Affordability has already improved on the back of lower dwelling values (values are down 5.3% across the combined capital cities since peaking back in October 2010) and the two rate cuts in November and December last year. Of course housing affordability will improve further after a rate cut.
Will the rate cut be enough to inject a confidence boost in the economy? Probably. Of course it depends on other factors, particularly how labour market conditions pan out and any announcements in the federal budget that affect the household balance sheet. Overall it makes sense that we should see some gradual improvement in the consumer mindset which will have a positive flow on for retail sales and property sales.