One rate cut not enough to help economy, but watch employment data: Macquarie

Macquarie Investment Management doesn’t expect the solitary rate cut will be sufficient to materially stimulate consumer spending or the housing market.

It has suggested the latest employment reading could be crucial in determining whether rates are cut again next month.

But Macquarie foresees that retail spending over Christmas will remain lacklustre and firms will continue to trim payrolls in order to protect profits. It says in that case the RBA will be forced to resume the rate cutting cycle.

“In our view, three further 25bps rate cuts in February, May and August 2012 appear most likely,” Macquarie says.

Of the 40% or so of households who currently have a mortgage, more than half of them are already paying more than their minimum monthly repayment.

“We think that most of these households will simply take advantage of the reduced interest payment to increase their principal repayment and pay off their mortgage more quickly.

“At the margin, those households that had fallen behind their mortgage repayments will certainly welcome any interest rate relief. But, relatively speaking, this will only affect a handful of people – something like 0.1% of households,” it says.

“Obviously, there will be some positive effect on consumer spending. But this will be only modest.

“And one rate cut won’t be sufficient to turn a sombre Christmas into a boom.”

But Macquarie thinks the reduction in interest rates may have more of an effect on the housing market.

“Lower interest rates boost the purchasing power of potential homebuyers,” it says.

“This means that there are more potential buyers for any particular property.

“That will provide some support to home prices which have been consistently falling over 2011.

“Indeed, we think that falling house prices – by reducing household wealth – have been one of the factors contributing to the cautiousness of consumers over the past year.

“Alongside increased housing turnover and firmer prices, lower interest rates will also support construction activity.

“Again, those potential households that have deferred entering the housing market because of low affordability may now be emboldened to dip their toe into the market.”

Macquarie stresses that if people believe that the November rate hike is a one-off, it is more likely that they won’t change their behaviour and the economy won’t get a boost in the middle of 2012.

“Paradoxically, by suggesting that rates won’t be cut further, the RBA may increase the likelihood that they will need to fall further in 2012,” the Macquarie report notes.

HIA and Westpac concur that more rate cuts are needed.