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Three reasons why interest rates could be set to fall

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Australians have been bracing for a rate increase for more than a year, but with every passing month the weakening housing market is pushing the Reserve Bank of Australia towards an interest rate cut instead.

Australia’s economy has a number of challenges which the central bank is going to find increasingly difficult to ignore, principal and portfolio manager at Quay Global Investors, Chris Bedingfield said this week.

Here are three reasons why we’re likely to see RBA cut rates:

1. The ratio of household debt to income is perilously high

The ratio of Australian household debt to income has more than doubled since 1995 and is now sitting at 212 per cent. This is a big risk, he said, and especially so as the housing market softens.

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Bedingfield explained the combination of a higher ratio of household debt to income, increased bank scrutiny after the Royal Commission and tighter lending conditions are all going to have a part to play in an eventual rate cut.

2. A slowing market is posing major challenges to the construction sector

Additionally, a slowing housing market poses some clear potential challenges to the construction sector.

“If we look at the historic ratio of construction jobs to total jobs, it could be as many as 250,000 jobs (or 2.2 per cent of the total workforce),” he said.

However, the simple maths is that if there are less houses being built, there’s less construction work.

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It can be argued the RBA fueled the east-coast housing boom to absorb workers following the mining boom. However, that too is coming to an end and posing a significant risk.

“While the RBA will be reluctant to cut given the current governors’ preference for financial stability over inflation, as far as financial stability is concerned, we fear that horse has already bolted,” Bedingfield said.

“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.”

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3. Business would benefit from a rate cut, not just consumers

Yahoo Finance contributor and principal at Market Economics, Stephen Koukoulas added that the ramifications of the RBA’s official cash rate call extend beyond the household sector. He said it would be “wise” of the RBA to cut rates in the name of business.

He argues lower interest rates would help guard against “the fallout from the unfolding household wealth destruction” and would also help free up the $940 billion in bank debt held by the business sector.

“This would not only help business to invest and hire more, it would underpin new business investment,” Koukoulas said.

Bedingfield and Koukoulas aren’t alone

While as little as a year ago, experts were nearly unanimous in predicting the RBA’s next official rate move would be up, that confidence has dwindled.

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In fact, 88 per cent of the experts on finder.com.au’s panel predicted the next move would be an increase in September. By November, that number had plummeted to 78 per cent.

Chief economist at My Housing Market, Dr Andrew Wilson said last week the RBA has painted itself into a corner thanks to consistent statements indicating the next move will be up.

However, “Ordinary inflation data, unions marching in the streets demanding higher wages, stock market crumbling and housing markets tanking [mean that] if the next wages index remains benign then a louder cut chorus will be heard,” he said in the finder.com.au rate survey.

Property strategist at Metropole, Michael Yardney agreed, suggesting the crisis in consumer confidence could push the RBA to “err on the side of caution” and lower rates.

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