The kindest cut

Published in the Sunday Times, August 2008 by Braden Quartermaine and Jordan Chong

Economists are unanimous in the view that home owners will get their first interest rate cut in nearly seven years on Tuesday.

A cut would end the run of 12 increases since December 2001.

Of 17 economists surveyed, 16 believed rates would be cut by 25 basis points.

And Westpac senior economist Justin Smirk predicted an aggressive 0.5 per cent reduction.

The past two cycles of reducing rates, which started in 2001 and 1996, both began with a 50 basis point cut.

Mr Smirk said the bigger cut was warranted because the turmoil in global credit markets had impacted the domestic economy more severely than the Reserve
Bank had anticipated.

"Now is the time to get out on the front foot," he said.

National Australia Bank head of Australian economics Jeff Oughton expected a cautious 25 basis point cut, but said there was more good news in store for home owners.

"By the middle of next year it will be clear that inflation is heading down and the Reserve Bank will have cut interest rates by over 100 basis points," Mr Oughton said.

Wealth Within chief analyst Dale Gillham said the likelihood of a string of cuts was exciting news for those with big debts.

"Reducing interest rates will go a long way to restoring business and consumer confidence, and with the increased confidence we can expect share prices to rise," Mr Gillham said.

The rate cut will be heavensent for Perth's mortgage-belt families trying to save their home as its value dips, while at the same time battling the increased cost of fuel and food.

Figures released by the WA Council of Social Services show the cost of living in WA rose by $61 a week over the past 12 months, and $132 a week over the past two years.

WACOSS said the boom was forcing families backwards, and that a family on an average income was no longer able to cover average living expenses.

House prices continue to slide, with the latest figures from the WA Real Estate Institute showing the median house price fell $14,000 in the June quarter to be almost $30,000 down on the start of the year.

New home sales in WA fell by 24.5 per cent in July, prompting the Housing Industry Association to say in a statement that "there can be no further delay inrespect to a drop in the official cash rate".