Interest rates predicted to drop 1%

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Global turmoil, weak consumer confidence and rising unemployment could push the Reserve Bank of Australia to drop rates by 25 bps in December 2011 and through 2012 totalling 100 bps.

 

According to Westpac, the catalyst for the drop in rates would come from offshore, but weak conditions in Australia’s  non-mining sector would result in further reductions.

 

Westpac chief economist Bill Evans also noted that “the consumer is of particular concern domestically”.

 

The Westpac-Melbourne Institute Index of Consumer Sentiment averaged 88 at the height of the GFC – “a disasterous level by historical standards”. The Index has remained weak since and in July it fell again to 92.8. Meanwhile, the bank is predicting unemployment to rise from 4.9% in June 2011 to 5.5%-5.75% through 2012.

 

In addition, softness in the housing sector is expected to encourage Australians to constrain spending and focus on savings.

 

“Housing is the major component of household wealth. Fears about falling wealth are likely to spur
further increases in the savings rate. That will further undermine consumer spending with a more significant bottom line impact on spending growth due to the weaker income backdrop.”

 

Despite predictions of economic gloom both domestically and abroad, a reduction in interest rates could be beneficial for homeowners should the banks reduce home loan rates. A 1% drop would reduce home loan repayment on an average $380,000 loan by almost $250 a month.

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