Why rates will fall in 2015: expert

Melbourne Cup is traditionally a day for making bets, and one economist has gone the long odds on what the Reserve Bank will do in 2015.

On Tuesday the central bank left the official cash rate on hold at 2.5 per cent for the 15th consecutive month.

Despite rates being at 60-year lows, Domain Group senior economist Andrew Wilson said they may get even lower.

In stark contrast to the 32 other experts surveyed by mortgage comparison website finder.com.au, who predicted that the next rate movement will be up, Dr Wilson believes a cut is more likely.

“I think the case is certainly stronger for lower interest rates than higher interest rates at the moment given rising unemployment, falling building approvals, a volatile stock market, a still too high dollar and falling house prices,” he said.

“We will have to start seeing an improvement in the economy, and certainly no more deterioration in those key indicators, to maybe offset a cut in interest rates some time in 2015.”

Dr Wilson said if the jobless rate increased, the Reserve Bank would move to cut rates as early as March next year.

But the majority of experts don’t believe the central bank would risk further stimulating the property market by dropping rates. Instead, according to the survey, the most likely outcome is that rates will lift in August next year.

Steven Pambris from the Bank of Sydney said given the “current pressures on residential prices especially in Sydney, a rate reduction will not be considered due to fear of fuelling the residential bubble further”.

AAP economist Garry Shilson-Josling summed up the Reserve Banks’s predicament as: “The housing market’s too strong to allow a cut but the rest of the economy is too soft to cope with an increase.”

However, there have been some signs that the property market is already cooling. According to figures from the Domain Group, all capital cities bar Sydney, Melbourne and Darwin recorded a fall in the median house price over the September quarter.

October figures released on Monday by RP Data also pointed a national slowdown, with dwelling values outside of Sydney and Melbourne largely flat or falling.

Dr Wilson said the Reserve Bank had limited options if the economy deteriorated. 

“We do need some stimulus for the economy and with a high budget deficit we really only have monetary policy as the lever to work with at the moment,” he said.

But given that previous rate cuts had already “washed through the system”, he said it was unlikely a further cut would reinvigorate the housing market.