The prospect of an interest rate cut in May has firmed after official figures suggested a further slowing in the housing sector.
The Australian Bureau of Statistics reported on Wednesday that the number of home loans approved in February fell 2.5 per cent.
The drop followed a 1.2 per cent fall in January, which RBC Capital Markets senior economist Su-Ling Ong said showed the interest rate cuts late in 2011 had only a limited effect on the housing sector.
"Rate cuts to date appear to have had only a modest impact, suggesting that overall lending rates remain too high," Ms Ong said.
The Reserve Bank of Australia (RBA) cut its cash rate by 25 basis points each in November and December to bring it to its current level of 4.25 per cent.
Westpac senior economist Andrew Hanlan said the weak home loan figure for February was due largely to a 9.4 per cent drop home loan approvals in New South Wales and a 1.1 per cent fall in Queensland.
"The state data suggests that the picture is not as weak as the headline suggests," he said.
"In the other states, you are seeing modest gains but they are certainly small increases."
Mr Hanlan said the large drop in New South Wales could be attributed to the state government's decision to scrap stamp duty exemptions for first home buyers on property's worth more than $500,000.
He said the overall data showing a housing slowdown added to the case for a further interest rate cut in May.
"Certainly the Reserve Bank would have been hoping to get some traction in the housing sector, but that just hasn't happened to date and it looks unlikely to now," he said.
"The housing sector certainly does need extra support and we would expect them (the RBA) to act immediately."
CMC Markets chief market strategist Michael McCarthy said the home loan approval data would not be the most significant factor in the RBA's next interest rates decision when its board next met, on May 1.
"It will remain one of the areas that the Reserve Bank takes into consideration, but this data won't make it any more or less important than it was previously," he said.
The RBA left the cash rate on hold at its April meeting last Tuesday but indicated it was open to a May rate cut.
However, the RBA said it was open to a rate cut if the March quarter consumer price index data, released later this month, showed underlying inflation remaining within the central bank's target band of between two and three per cent.
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