Experts weigh in on rate cut possibility as confidence drops

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The nation’s central bank may cut rates before the year ends to prevent a possible recession, experts suggest.

"Consumer confidence readings [in Australia] are now under close scrutiny, and any deterioration there will be the main channel for an interest-rate cut in coming months," Michael Turner, fixed income strategist at RBC Capital Markets was quoted as saying in The Australian.

"If the central bank starts feeling confidence has softened heading into Christmas, the probability of a December rate cut will rise."

Westpac was the first of the major banks to announce an increase in its variable mortgage rate by 0.2% for November. In the days following Westpac’s declaration, the nation’s three other major banks also announced increases to their variable rate mortgages. Notably, variable rate mortgages are the type of home loans held by most Australians.

Meanwhile, there were indicators not long after the announcements that consumers were spending less freely. ANZ-Roy Morgan’s survey last week discovered that customer sentiment took a 2% weekly drop. The latest survey on Tuesday had little improvement, highlighting the concerns of customers over their personal finances after the rate hikes.

"The lift in mortgage rates over the past week is essentially a quasi-tightening on the economy," said Savanth Sebastian, CommSec brokerage economist. Sebastian added that a rate cut before the Christmas season would help improve consumer activity throughout the country.

Australia’s mortgage rate hike came at a time when a sustained downturn in the prices of commodities is hurting the nation’s economy, as well as the economies of other resource-rich countries like Canada and Norway. Indeed, the central banks of these other nations are considering additional stimulus measures.

In contrast, the US Federal Reserve plans to raise rates as the US economy looks to be recovering.
 

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