Following the Reserve Bank Board meeting Tuesday 6 May, the official cash rate has remained unchanged at 3 percent. The question now is does this signal the end of rate cuts? Rhetoric emanating from the United States this week suggests that economic conditions may be improving with the head of the US Central Bank Ben Bernanke suggesting the US economy may begin to strengthen by late 2009. A stabilisation of world economies (should they occur) would certainly seem to suggest that Australia is nearing the bottom of the rate cutting cycle.

Current markets for cash rate futures suggest that the cash rate will bottom in November at 2.48 percent, a further cut of approximately 50 basis points. The market is also signaling that the cash rate will rise quite rapidly thereafter with interest rates anticipated to be above their current level by June 2010 and reaching 3.55 percent by October 2010.

Retail trade data which was also released this week shows that on a seasonally adjusted basis retail trade increased by 2.2 percent in March following falls of 2.0 percent in February and an increase of 0.5 percent in January. Department stores (13.2 percent) and clothing and soft goods retailers (6.4 percent) were the greatest benefactors of the increase in retail trade. Obviously the numbers are impressive however, putting them in perspective, the March numbers are likely to have been boosted thanks to the Government Stimulus payments which saw people’s propensity and ability to spend increase.

Building approval data released this week showed the first monthly increase in approvals since September 2007 with the trend estimate for dwelling approvals increasing by 0.4 percent in March 2009. Despite this slight increase, building approvals are still well below historic levels and both approvals and commencements need to increase dramatically as the under supply of Australian dwellings continues to increase.

The HIA-CBA First Home Buyer Affordability Report released this week found that first home buyer affordability improved by 14.6% during the first quarter of 2009 and now sits at a seven year high. These results are unsurprising given the impact of the First Home Buyers Grant Boost coupled with the lowest interest rates in more than 45 years.

Although some speculate that the boost to the First Home Buyers Grant will create Australia's own sub-prime market, these concerns seem quite unwarranted with most banks and lending institutions having tightened their lending criteria and requiring a history of savings as well as a deposit of at least 5% and in most cases 10% in order to be eligible for a home loan. Whilst the impact of the First Home Buyers Grant Boost has been positive it is likely that the low interest rate environment, property value falls through 2008 and escalating rental rates is significantly contributing to first home buyers purchase decisions.