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Commentators are increasingly speculating about multiple interest rate adjustments occurring this year, with one going so far as to say “the markets think it’s a dead certainty rates are going to be cut by April 2015”.
Speaking about the year ahead, SQM Research managing director Louis Christopher said there is a high probability the Australian Prudential Regulation Authority (APRA) will impose lending restrictions on investor activity this year, but said this would open the door for even more interest rate cuts to occur.
“I think there is a high probability that APRA, prompted by the RBA will take greater action in 2015. They will do this in an attempt to reduce risky, speculative investor behaviour, particularly from those who should not be taking on large amounts of housing debt due to their limited capacity to pay it back,” he said.
“However, if APRA does move, it could potentially open the way for the RBA to make rate cuts, possibly more than the standard 25 basis points. It’s clear to most the economy is weak and if it wasn’t for the threat of a national surge in house prices, rates would most likely be lower today.”
Mr Christopher said so far, APRA’s announcements have “amounted to no more than jawboning”.
“They appear to have flagged further action, but if and when that comes remains to be seen. Could there be a situation behind the scenes where the two government departments are in open communications with each other on the timing and magnitude of the action? Possibly,” he said.
According to Mr Christopher, this is overwhelming evidence the cash rate will continue to be reduced this year.
“Basically, the markets think it’s a dead certainty rates are going to be cut by April 2015, with the chances increasing of another rate cut in June to take the cash rate to two per cent,” he said.
“If such rate cuts happen, housing markets would be boosted throughout the course of the calendar year with most cities recording growth at the top end of our forecast ranges.”
Mr Christopher said a rate cut would also lower the Australian dollar, which would stimulate local tourism economies and their respective housing markets – which would “surely… force APRA’s hand”.
“Right now we are unsure of the magnitude they would place in curbing investment lending. So it is an x factor to be watchful of," he said.
“In the extreme, APRA could forcibly increase loan-to-value ratio requirements on the banks – for example, require investors to present up to a 20 per cent down payment, which would without doubt slow the east coast housing market.”
Mr Christopher said he suspects such radical action is unlikely and predicted APRA will take a more measured approach.