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A leading economist has predicted that the Reserve Bank will “reluctantly” cut interest rates next year due to concerns about house prices.
There has been ongoing speculation that the cash rate could rise in 2017, following four months of a record low 1.5 per cent.
However, Stephen Koukoulas – ex-chief economist of Citibank and economic adviser to former prime minister Julia Gillard – told REB’s sister publication Mortgage Business he believes there will be another cut next year.
“I think the RBA will cut again, reluctantly, because they’re worried about house prices, particularly in Sydney and Melbourne,” Mr Koukoulas said, referring to the two capital cities where median house prices are at record highs of $1.06 million and $770,000 respectively.
“I think, maybe early in the new year, if we get another low inflation result at the end of January, if the labour market remains sluggish, the risk reward for the RBA is just to trim rates a little more, which might take a little bit of heat out of the Aussie dollar.”
Mr Koukoulas said the Reserve Bank should have cut rates earlier to free up cash flow for businesses and “indebted households” that are struggling to meet mortgage repayments.
His comments echo that of AMP Capital chief economist Shane Oliver, who recently suggested that it was still “way too early” to rule out further rate cuts next year.
Mr Oliver said he was “allowing for one rate cut in the first half of next year”, adding that “regardless of whether there will be further cuts or not, a rate hike remains a 2018 story at the earliest”.
Both economists also said mortgages could come under scrutiny next year. Mr Koukoulas said the RBA may be tempted to “lean on the regulators” so that it is more “careful in how much they’re lending for the housing market”.
Meanwhile, AMP’s economist said the RBA “may also need to offset increases in bank mortgage rates that are being driven by the rise in global bond yields”.
Their comments came after a RateCity analysis of more than 30 key economic indicators suggested that the Reserve Bank’s easing cycle had ended and the likelihood of a rate hike next year was increasing.
“Australians should get ready for rates to go up next year to cool our hot housing market,” RateCity data insights director Peter Arnold said.
Mr Arnold said banks had already started moving their fixed rates higher, with Westpac the first major to do so.
“With that, many lenders [are] moving fixed rates up. It’s the best sign that we have that a variable hike is on the way,” he said.
Mr Arnold pointed to findings from international forecasters, namely the OECD, that said rate hikes were needed to “unwind tensions from the low-interest environment, notably in the housing markets”.
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