The Next RBA Move will be Downwards

When yours truly was on Seven’s Sunrise back in May it was acknowledged by both David Koch and myself that the Reserve Bank of Australia (RBA) would be unlikely to lift rates that day, with the knowledge that things were looking worse in Europe and there were already signs of a slowdown on housing here. We were wrong.

The RBA lifted rates that day by yet another quarter point to 4.5 per cent. At the time it was largely expected by economists.

However, I believe it was a serious mistake to lift cash rates; similar to the mistake made in 2008 when the RBA thought lifting rates was a prudent idea in the first half of that year.

Now, sure, the RBA board members do not have a crystal ball and can only go on present information at hand. So it was not to know of the events on Wall Street and in Europe later in the week (the so-called “flash crash”).

However, Europe had been simmering for some time before May and as each week had gone by in March, and then in April, the situation was becoming worse and worse.

Yet the RBA moved rates higher in May largely on the belief the housing market was still surging ahead. This belief was due to, among other factors, auction clearance rates.

But, as I have stated before, there has been an increasing number of passed-in auctions failing to make it into the official results and clearance rates.

The problem with this is that the RBA has been relying on auction clearance rates to get an indicator of the market. Naturally, to think that it may have lifted interest rates in May partly based on incorrect data is a disturbing thought.

Now, not much more than a month later, the banks are starting to cut their fixed rates. And banks only tend to do that when they are sure cash rates have peaked.

Even the real estate spruikers have been stating the housing market is slowing. You know the market is seriously slowing when they do that.

The positive news in all this is that the probability of further interest rate rises this year has all but been eliminated. And I believe the next move is actually going to be down.

That is because the RBA was lifting rates to stop a potential housing bubble. Now that risk has gone and, indeed, the risk has increased for house price falls, the RBA can accommodate a cut and will likely make a cut if Europe drags us down and/or house prices retreat.

The RBA will never admit it, but it made a mistake in May. And that’s why I believe the probabilities have risen that the next move will be down.

Louis Christopher is the managing director of SQM Research and the head of property at Adviser Edge.