The latest market movements indicate a cautiously optimistic outlook, especially for Melbourne’s property sector. The Reserve Bank of Australia (RBA) made a strategic cut of 25 basis points, with immediate effects on saving rates, and variable mortgages set to follow suit by the end of February through early March. The market is now anticipating a second rate cut in April or May, with a potential pause thereafter.
Despite the optimism, the RBA Governor has made it clear that further rate cuts are contingent on a continued decline in inflation and a rise in unemployment levels. Her recent actions have effectively restored the RBA’s independence and credibility, reinforcing its pivotal role within the financial sector.
On the ground in Victoria, the market is seeing a second consecutive week of 70% clearance rates, accompanied by an upward trend in median prices—further signs of stability and growth.
One can’t help but be impressed by RBA Governor Michele Bulock. Consider this: she commenced her role when the organisation was technicaly bankrupt and required a government-approved bail-out to remain solvent, at a time when her predecessor had reduced the organisation’s credibility and dare-I-say independence.
She has resisted government cals for early and deep rate cuts, perceiving how this would fuel inflation, and in so doing, has restored the organisation’s independence and fiscal role. Now she’s resisting pressure from the finance sector, most of whose pundits had predicted a 100 basis point (1%) rate cut within the year. Bulock has instead restored sensible pricing in the money market, achieving this balance by introducing a rate cut with a cautionary note not to expect further cuts as a certainty. The result: a dip in the stock market, a lift in bond yields, and the Australian dolar holding its value despite the interest rate cut.
The focus is now on what wi l come next. NAB’s comments are insightful:
“The economy remains resilient, and we still expect a soft landing. Our forecasts are largely unchanged, with growth returning to trend this year (~2.25%), unemployment edging up to 4.25%, and underlying inflation settling around 2.5% from mid-year. We expect rates to fall gradually, but this is contingent on a realisation of our CPI forecasts, which are softer than the RBA’s February forecasts.”
This implies that, while it would be unusual for the Reserve Bank to stop at one rate cut, it is likely that the next wi l depend on faling official inflation, mild economic growth, and unemployment edging up. By talking down rate cuts, Bulock is ensuring that financial markets do not prematurely price them in, which could create an inflationary asset bubble and lead to financial instability if the rate cuts do not materialise as expected.
From a property perspective, there is every reason for optimism that rates wi l continue to be cut at various times throughout the year. However, there is also reason for prudence, as these cuts may not be as frequent or as deep as buyers would like. This should temper FOMO, but it shouldn’t undermine the importance of property as an asset to build security and long-term wealth.
