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Writer's pictureLuke Starr

TIP: RBA meets today to rule on interest rates, prices recover in June, what will the banks do next?

Will rate cut plus tax package equal happy economy?


The Reserve Bank will meet today to determine if the official cash rate should be cut. Keep an eye on the skies at 2:30pm this afternoon for what is widely expected to be a second month-on-month cut to bring interest rates to a record low of 1 per cent.


No prizes for guessing today's media is full of analysis and speculation around Australia's immediate and longer-term economic future. This week's combination of a RBA meeting and the resumption of federal parliament to debate the Morrison government's $158 billion tax package has got economists excited.


As we've been hearing since ScoMo bounced back in May, economic stimulation is going to take more than movement on interest rates. The government wants its tax package passed through both houses by the end of the week; Labor yesterday said it will keep its options open if its bid to split the three stage bill is rejected - and it will be rejected - which suggests its objections at this stage are likely token at best.


But will a second rate cut be a good thing?


Not if you're worried about Australia's debt levels, it isn't. Australia's debt to disposable income ratio currently sits at around 190 per cent - which is alarmingly high. The RBA is cutting rates to essentially improve conditions for job creation - but if wealth is dropping due to property price deflation, and wages aren't growing, people will spend less. And according to IFM Investors economist Alex Joiner, cutting rates now puts Australia at risk of even further deterioration of household debt metrics.


According to the retail sector, a rate cut today will also spook consumers and make Australia's retail trading conditions even worse than the 10-year low it is currently experiencing.


Property market showing signs of recovery


CoreLogic's Hedonic Home Value Index showed yesterday that property values grew 0.2 per cent in Melbourne and 0.1 per cent in Sydney in June. The expectation is that this will result in more listings and buyers over coming weeks.


The expectation of a rate cut today will, according to CoreLogic's Tim Lawless, will improve conditions and aid market stabilisation. He went on to say however, that the fact that 80 per cent of new jobs growth in Australia is in Sydney and Melbourne is the single biggest factor aiding an earlier recovery in the country's two main cities. He also cited the removal of risk of changes to property taxes at the federal election in May as another major contributor to the turnaround.


So, what will the banks do?


Last month, we saw a combination of lending and savings interest rate cuts across the major banks. Both the AFR and The Australian have run editorials today drawing attention to the fact that while the banks will cry poor and moan about regulation, we should be under no illusions about the heavy role they play in stimulating the property sector and the economy.


This ABC piece offers a collection of insights into what the bank's customers are worried about. It's a good reminder that while the banks, APRA, the RBA and government all shuffle around the Blame Game board, there are some stark realities of the financial situation of the majority of the Australian population worth keeping in mind.

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