Interest rates, they are a-changin'

The Reserve Bank of Australia finally capitulated and cut the cash rate of interest and now has symbolically flagged the start of better times that will eventually arrive for home borrowers as well as the mortgage industry generally.

But don't get too excited, just as the hard hit from relentless rate rises took some time to bite the real economy, this easing will need some soaking in time.

Back in business

In case you missed it, the RBA has lopped 0.25% off the cash rate of interest from 7.25% to 7%.

The reaction at auctions over the weekends since this first cut should show that homebuyers want to return to the country's favourite asset.

Property investors should be hot to trot to get into the borrowing caper as rents have been rising and house prices have been slumping. The conditions could only be helped if the US-inspired credit crunch gets better at a quicker rate. This would reduce international borrowing costs and expedite the re-establishment of securitisation.

Christmas delivery

Anyone deeply involved in the mortgage and finance broking fraternity prays that the good old days, even in a less generous and more expensive form, would be the best Christmas gift we could see this year. And that's probably the right kind of timing to put on the arrival of better days.

Betting on further cuts

Rory Robertson, the interest rate strategist at Macquarie Bank, thinks we will see another rate cut in October, while others predict it could be later, as the RBA board plays a 'wait and see' game.

My suspicions are that if we don't see another cut by October, then we will get one in November. The timing will depend on the run of economic data over September. If there are continued scary moments for the economy where recession threatens, then October will bring the second cut.

If there is nothing dramatically negative, then the RBA could make us wait until the first Tuesday in November! There is actually a history of rate changes - though mostly up! - around the Cup carnival.

More predictions

Robertson thinks more good news comes next month.

"This first cut in seven years probably will be followed by another 25bp cut on 7 October," he said on the day of the rate reduction. "Today's cut is designed to limit the growing risk of recession, or in RBA-speak: "The risk of a deeper and more persistent slowing in the economy."

Robertson not only reads the economic tea leaves, but watches some of the country's commentators who he thinks have insider status with the RBA.

"For the past fortnight or more, 'well informed' economics editors have reported confidently that the RBA's easing cycle will begin with a 25bp cut, probably back-to-back cuts of 25bp," he said.

The Final Cut?

The insiders say they don't expect cuts of more than 1% in total and some say 0.5% might be it! Time will tell, but these cautious optimists were the same crew who were predicting a few months ago no cuts at all this year.

The RBA reaction

The critical fact is that the RBA underestimated the slow down of the economy and that's why they have waited until now to start the cuts. Recently, economic data on profits and business investment have made many 'experts' wary about how many cuts in rate we will see.

However, this data all relates to the three months ending June 30. It is now September and we have seen three months of pretty horrific economic readings - that's why they cut this week.

In fact, over the past three months the view on the health of the global economy has deteriorated and that in part explains why oil has tumbled from $US145 a barrel to $US 111 this week.

It could be argued that the RBA is taking away the extra tightening of interest rates imposed on us by the banks and that's a fair call. The banks did add more drama for demand and helped worsen both our economic condition now, as well as our outlook, by raising rates.

A helping hand

Helping the case for those sweating on more interest rate cuts has been an improved reading on TD Securities Inflation Gauge, and this coincides with lower oil prices and commodity prices. Ironically, interest rate cuts will also factor in lower price pressures for inflation and that helps the Big Bank deliver more rate cuts.

Tough times remain

There is one important matter many economists seem to overlook when evaluating the potential demand for the Oz economy going forward and that's the impact of a stock market that has dropped over 20%.

This not only hits hip pockets, it works against consumer and investor confidence. This confidence can rebound but it, in all likelihood, will need more than one or two 0.25% rate cuts to make interest rate sufferers believe that all's rosy in their economic gardens.

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