2019-10-22 09:47:261970-01-01 00:00:00

Rate Cut

RBA, the reserve bank of Australia, is the Australian central bank. One of its biggest roles is to manage Australia’s federal interest rate, with a consideration of the economic information including the unemployment rate, inflation rate, and housing price. The adjustment on the RBA interest rate would have a ripple effect on the entire economy.

As the economic growth slows and the inflation rate remains at a low level, it is widely expected that the cash rate will fall. The rise in the unemployment rate (to about 5.2 percent) in April may be the last evidence that the RBA needed to cut the interest rate. After a month of forecast and speculation, the RBA Governor Philip Lowe gave a speech on May 21, 2019, to claim that RBA would possibly reduce the interest rates next week. The decision hopes to break RBA’s long-held record of holding the interest rate at 1.5 percent for the 30th consecutive time. This is a major and rapid shift, considering the federal bank was planning to raise the cash rate last year. However, the economic slowdown changed the bank’s mind to increase the cash rate.

As reported in the Australian Financial Review, in response to the RBA’s introduction of a quantitative easing bias, Bill Evans, a chief economist at Westpac Banking Corp (ASX:WBC), believed that there may be three rate cuts from now until November 2019, which means interest rates will fall to 0.75%.

Impact on the housing market

Australian house market has remained fairly weak as the property price in the Australian major cities fell by 10 percent over the past 18 months. Especially in Sydney and Melbourne, the house prices fell by 0.7% and 0.6% in April; CoreLogic data released earlier this month showed an annual decline of 10.9% and 10% respectively in Sydney and Melbourne. Moreover, the capital cities of New South Wales and Victoria fell by 14.5% and 10.9% respectively from their highest point in July and November 2017.

Interest rate cuts refer to the changes in the cash rate adjusted by the central banks. When interest rates decrease, the interest earned from depositing funds into banks is reduced. Therefore, interest rate cuts will cause funds to flow out from banks, and deposits will be withdrawn to become capital for a better investment. This would eventually increase the liquidity in the Australian financial market, which will provide an incentive for the corporates to increase their loans for future reproduction and encourage the consumers to purchase large commodities; thereby boosting the domestic economy.

Specifically, for the property developer in the housing market, interest rate cuts would reduce their financing costs and improve their new property development capabilities. Housing buyers can be divided into self-occupied and investment-oriented. For self-occupied homebuyers, interest rate decreases are a preferential policy that reduces their burden on the house loan. In terms of investment-oriented buyers, a drop in the interest rate would discourage investors from over-investment in properties and price speculation.

After RBA announced the interest rate cut, it is widely believed that the interest rate decrease decision will be a direct remedy and a correction for falling house prices. Therefore, a reduction in the cash rate could possibly be related to the remarkable reverse in the falling house price last week.

The real estate market in Sydney and Melbourne showed early signs of ending its steep slides, as the auction clearance rate rebounded sharply in last Saturday.  Prices in these two major cities have also risen, which offset the decreasing trend in the first half-year. According to CoreLogic, Australia’s initial consolidated capital clearing rate increase to 62.6%, which was a significant growth from the 57.0% that recorded seven days ago. About 2,041 houses were sold during last week, which was more than double of the previous weekly record of 917.

The concerns with the rate reduction

Even though the reduction policy can be a tool for stimulating the development of the economy, it can not be described as a piece of good news. It would be unusual for RBA to cut the interest rate when the country is experiencing an economic boom. The central bank will decrease the rate if they are concerned about an economic downturn.

Moreover, it is a public concern that the policy may not be able to effectively respond to the housing market condition immediately. Take Western Australia as an example, house prices in Western Australia had fallen longer than other regions, and consumer spending was declining. This is circumstantial evidence that as house prices fall, savings will rise over time. In this case, the lower interest rate and the quantitative easing policy would limit the drop in house prices. However, it is unclear whether the impact on the change in house prices can prevent a sharp rise in savings, which is an indication of a possible recession. Thus, whether the consumer confidence in the real estate market is low or high, in addition to adopting relevant fiscal policies, the state needs to consider the application of administrative means.

By Louis Cai

Click here for a 7 days access to our Lotus Blue Portal.

KOSEC does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information provided. KOSEC is intended to provide general information only. Please be aware that investing involves the risk of capital loss. This message is confidential and may be privileged. It is intended only for the use of the addressee named above. If you are not the intended recipient, any unauthorised dissemination, distribution or copying is illegal. We do not guarantee the security or completeness of information hereby transmitted and are not liable in either respect or in respect of any delay. Nothing in this message is intended as an offer or solicitation for the purchase or sale of any financial instrument. Any market prices or data, unless specifically verified and identified as such, are not warranted as to completeness or accuracy. Kodari Securities Pty Ltd (KOSEC) is a Corporate Authorised Representative (No. 399 556) of Longhou Capital Markets (AFSL No. 292464) which is regulated by the Australian Securities and Investment Commission (ASIC). KOSEC wishes to disclose that KOSEC and its staff may hold stock they recommend in their own portfolios and that any decision to purchase recommended stock should be done so after the purchaser has made their own inquires as to the suitability to their own requirements. Click here to view our FSG.

KOSEC Terms & Conditions

Kodari Securities Pty Ltd (CAR 399556) trading as KOSEC is regulated by the Australian Securities and Investment Commission (ASIC). KOSEC is a financial services company and any information provided by its platforms, portals, reports and documents is protected by copyright. Any unauthorised production of this information is prohibited.
KOSEC reserves the right to change or remove any information provided on our website, reports or any documents including these terms and conditions at any time without notice. The change or modification to the terms and conditions will be effective immediately upon posting an updated version on our website, necessary platforms and documents. It is recommended that you review the information provided on our website, including these terms and conditions frequently for any changes.

KOSEC provides general advice only. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. KOSEC recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. Please make sure you read our Financial Services Guide (FSG).

KOSEC does not guarantee any returns. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance). Investing in the stock market can incur huge losses. Please also be aware that fees will incur on every transaction regardless of the performance of your investments or returns generated. Employees and or associates of KOSEC may hold one or more of the stocks, securities or investments reviewed by the company.

Your use of information from our website, reports, documents and from talking to our representatives/associates is at your risk. Under no circumstance should the investment be based solely on KOSEC information and general advice. You should seek professional financial planning advice.
KOSEC aims to maintain the accuracy of the data and information provided on this website, by using information prepared from a wide variety of sources, which KOSEC to the best of its knowledge and belief, considers accurate and does not make any representations or warranties of any kind, expressed or implied, about the completeness, accuracy, reliability, suitability or availability of the information provided.

We may at times refer to third parties, which the details of these third parties have been provided solely for you to obtain further information about other relevant products and entities in the market. KOSEC has no control over the information third parties have, or the products or services offered, and therefore make no representations regarding the accuracy or suitability of such information, products or services. You are advised to make your own enquiries in relation to third parties. Our inclusion of any third party content is not an endorsement of that content or the third party.

As a client you will be charged a yearly service fee and a set brokerage fee per transaction. Your service fee will automatically renew at the end of your agreed 12 month period at the same rate advertised at the time. Your credit card or bank account will be charged for a further year following which will again auto renew until you cancel your yearly service fee. You can cancel the auto renewal at any time in advance of the renewal date by contacting us. KOSEC is aware of the need to ensure the security of your credit card details and our payment systems are compliant with the Payment Card Industry (PCI) Data Security Standard.

You consent to receiving email correspondence from KOSEC, as well as companies KOSEC has an association with. These emails will be sent by KOSEC and third party companies. You can opt out of receiving any category of emails at any time by contacting us. We may from time to time inform you of special offers, or even ask your opinion of the services we provide, but your involvement is optional. Should you request us to do so, we will archive your details.

Indemnity and Liability
You indemnify KOSEC from all claims or threatened claims, suits, demands, damages, costs as well as including legal costs incurred in dealing with any threatened claim, expenses made by any person or corporation against KOSEC and any other amounts which is caused by KOSEC providing information, execution and General Advice.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from a decision made by you on the basis of information obtained through the use of our portal, reports, documents or any General Advice given and any transaction taken place.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from delays in executing orders for the client and acknowledges KOSEC makes no guarantees about the time taken to execute an order on behalf of the client. You acknowledge that KOSEC relies on third parties in providing technology and release KOSEC from any harm, loss or damage you may suffer as a result of the failure of such information technology.

Cookies and Links
KOSEC website, and its portal uses cookies, which lets us identify your browser while you are using the site or our portal. Cookies do not identify you personally. They simply allow us to track your usage patterns. If you prefer not to receive cookies, you can configure your browser to reject them or to notify you when they are being used. The functionality of the KOSEC website may be impacted if you restrict the use of cookies.

Fill up the form below and we will get back to you as soon as possible.



KOSEC’s CEO, Michael Kodari’s new book, “Stock Market Success” valued at $39.95, available at Dymocks book stores with all the proceeds going to Dymocks Children’s Charities.


Latest TV Commercial