Many industry experts now believe that the next move by the Reserve Bank of Australia will be to further lower the overall cash rate.
In a report on Business Insider Australia, AMP Capital chief economist Shane Oliver said the combination of declining home prices, a stricter lending environment, and muted housing growth will keep household wages weak, compelling the central bank to cut rates.
"However, with the RBA still seeing the next move as being up, it will take them a while to change their thinking, so we don’t see rates being cut until second half next year," he said.
When RBA starts to cut rates, Oliver said it will likely stick to 0.25% increments.
"Since rate moves are a bit like cockroaches, there is likely to be more than one," Oliver said.
In an earlier report, Market Economics principal Stephen Koukoulas projected that the RBA will likely cut the official cash rate, arguing that lowering the interest rate could prevent the negative impacts of household wealth destruction and help free up a sizeable amount of debt held by the business sector.
Quay Global Investors portfolio manager Chris Bedingfield shared the same position on interest rates. He said the high household debt level would urge RBA to consider taking cash rates down a notch.
Furthermore, the weakening construction sector, an indicator of the housing demand, will likely influence any decision on cash rates. A slump in the construction sector will have a significant impact on the economy, given that 2.2% of the total workforce is from the sector.
"If the housing market continues to weaken, we believe the risk is that the RBA will face a sharply weaker economy in 2019 and will be forced to consider an official rate cut before the end of the decade," Bedingfield said.
For the month of December, RBA decided to leave the nation’s official cash rate on hold at 1.5%.
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