will remain on hold whilst the RBA waits to see how last month’s cut will affect our inflation rate and if the US Federal Reserve will raise interest rates at their September meeting later this month.
To better understand their thinking behind this and the future direction of interest rates, here are 3 experts views:
Martin Lakos ( Macquarie) comment:
The RBA met on Tuesday 6 September and kept interest rates on hold at 1.5%.
Following the decision in August to reduce rates to the historically low 1.5%, it’s no surprise the RBA have paused and are observing the impact of the two rate cuts this year and are waiting for new inflation figures to be released in late October.
The next RBA board meeting will be held on Tuesday 4 October.
Tim Lawless (Corelogic) comments:
After two rates cuts already this year, the hold decision was widely anticipated, as the RBA monitors the effects of the record low cash rate on the economy and currency.
The RBA is likely to be keeping a keen eye on the housing market; since the May rate cut and subsequent cut in August, many of the key housing market indicators have bounced higher.
Auction clearance rates have returned to the highest reading in more than a year, albeit on lower volumes.
CoreLogic’s hedonic index has seen some acceleration in the rate of capital gain across the already hot Sydney and Melbourne markets and the value of investor housing finance commitments have recently rebounded to the highest levels since August last year.
In contrast, there has been a consistent wind down in transaction numbers which implies market demand may be getting exhausted.
While affordability barriers and tighter lending conditions are likely to be contributing to the slowdown in transactional activity, another factor is simply that there are historically low numbers of homes being advertised for sale in Sydney and Melbourne which is contributing to the upwards pressure in the market and limiting transaction activity due to low stock levels.
With monthly indicators of inflation remaining low and the Australian dollar remaining relatively high, there remains a strong chance of another rate cut later this year.
The most likely timing will be the November RBA meeting when September quarter inflation data is available.
Another low inflation reading combined with a stubbornly high dollar could result in the cash rate moving lower.
Eliza Owen (Residex) comments:
The Reserve Bank of Australia announced it will hold the official cash rate in September at the historically low rate of 1.50%.
The decline of rates throughout 2016 may be partly attributed to the stubborn Australian dollar, which hovered around US$0.76 for most of July and August.
The RBA have used subtle language and interest rate cuts in an attempt to de-value the Australian currency over the year.
A lower Australian dollar increases competitiveness of Australian goods.
It also increases general prices through imported inflation, lifting the price of imported inputs for Australian goods and services.
The annual inflation rate of just 1% to June in Australia looks set to remain low, at least over the remainder of the year.
Despite the best efforts of the RBA, the AUD continued to climb gradually since May, which partially contributed to the August cut.
The persistently high AUD made a case for further rate cuts.
That was, until, Federal Reserve Chair Janet Yellen spoke at a symposium on the 26th of August.
Yellen argued that strengthening in the US labour force meant “the case for an increase in the federal funds rate has strengthened in recent months”.
The speech was followed by comments from the Vice Chair Stanley Fischer, who indicated that US rates could rise as soon as September.
This hint at higher interest rates saw a boost to the USD, and a complementary weakening in the AUD.
Graph 1 shows the movement of the AUD relative to the USD over August.
This took pressure off the RBA to use monetary policy as a means to lower the dollar, and may have contributed to the hold decision this month.
Graph 1: AUD/USD-August 2016
Source: RBA & Trading Economics
The next Fed rate decision is September 22nd, and an increase is likely to place further downwards pressure on the AUD and potentially create room for the RBA to delay further rate cuts.
This is important, because residential property value growth and dwelling approvals in Sydney and Melbourne have continued to be reactive to rate cuts earlier this year.
Across Australia, dwelling construction saw a 1.2% increase over the June quarter, and a strong 6% increase over the year.
Meanwhile, other sectors of construction work fell dramatically: engineering work fell by 9% in the quarter, and private construction fell by 14% over the period.
Building approvals were up across Australia in July, as the number of units approved increased 4.97% year on year.
However, across the country the number of separate houses approved fell by 3.19%.
Much of the growth in dwelling approvals for the year was driven by the Sydney and Melbourne markets.
This was expected following a May rate cut as more dwelling development projects gain cost benefit.
A hold in rates is likely to see the market steady.
Graph 2: Trend Data – Residential Dwelling Approvals Australia Wide
Source: RBA & Onthehouse.com.au
Graph 3: Trend Data – Total Residential Dwelling Approvals by Capital City
Source: RBA & Onthehouse.com.au
The number of dwelling approvals across Australia over time is shown in Graph 2.
While 2012-15 saw a steep increase in the number of dwelling approvals, another small upward trend can be seen over 2016.
Graph 3 shows the original monthly data of total dwelling approvals by capital city (which is volatile relative to the trend data), with Sydney and Melbourne experiencing a significant surge.
The movements in dwelling approval data is expected, as it follows capital growth in the dwelling market.
Following the May rate cut, Residex observed strong growth in Sydney and Melbourne dwellings for the June quarter, including a 1.85% surge in Sydney units, and 2.29% in Melbourne units.
The RBA faces a two-tiered economy in which housing has boosted growth in the south-east coast of Australia, while growth in other cities across Australia is subdued.
Part time employment in Australia also reached a record high of 31.63% in July, suggesting ongoing structural challenges in full time job creation and wage growth.
As the rate is held for September, we may expect these east coast markets to steady a little, and growth in approvals start to flatten.
Source: On the House
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