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RBA cash rate cut needed in February

Friday, December 28, 2012

The Reserve Bank needs to cut the cash rate by a large amount in one big hit to stimulate a recovery in the housing market, according to Residex chief executive John Edwards.

On the back of November Residex housing market data, which shows many markets in negative territory or treading water, Edwards says the Reserve Bank should look to cut the cash rate by 75 basis points in February.

“Should the RBA continue along the road of small reductions, there is a real risk that it will need to reduce the cash rate to 2% or less.

“However, should it move to a much more significant reduction in February (of around 0.75 percentage points), this would probably achieve its objectives and bring the cycle of small rate adjustments to an end.

“The outcome would be the removal of constant press about the likely poor outcome as the resources boom comes to an end.

“Importantly, it would be probably sufficient to stimulate consumer spending and encourage small business investment. In all probability, this outcome would lead to a much improved level of consumer sentiment,” he says.

Edwards says housing markets had done better in 2012 compared to the previous year, but had failed to keep pace with inflation.

“The majority of cities have produced negative real rates of growth (after taking inflation into account). In fact, the real growth was a -2.8% in housing while for units it was -1.23%,” says Edwards.

Despite the poor performance of the market in 2012 in real terms, Edwards says he expects all adjustments in house prices since the GFC to be “recovered in the medium term, and prices are anticipated to be equal to or better than before the GFC”.
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