The Reserve Bank of Australia has kept rates on hold at 1.5%.
The decision to leave the cash rate on hold today came as no surprise to those following our economy.
To better understand the decision, here’s some interesting expert commentary:
Martin Lakos ( Macquarie) comment:
The decision to keep the official cash rate on hold at 1.5% at the April meeting of the Reserve Bank board came as no surprise.
Unemployment dropped to 4.9% as the labour market improves although the participation rate dropped, that is, fewer people looking for work.
However, there is no sign of the flow on effect of improving wages growth which is symptomatic for inflation.
At 1.8%, the inflation rate has undershot the RBA’s target range of 2-3% for nearly 3 years.
It’s Macquarie’s view that the RBA will likely keep rates on hold until after the May Federal election.
Comments from Tim Lawless:
Although the cash rate remains unchanged since August 2016, there is a growing likelihood that the cash rate will move lower later this year.
While labour markets remain strong, low unemployment and above average jobs growth is generally confined to New South Wales and Victoria.
Concerns around slowing consumption as the wealth effect reverses, causing households to pull back on spending and revert to saving were likely a central theme of the RBA’s board meeting deliberations.
The ongoing falls in dwelling values have the potential to weigh down consumer attitudes towards spending and cause a sharper than anticipated fall in residential construction activity.
The latest data from CoreLogic shows the pace of decline has eased off somewhat over the past couple of months, but the geographic scope of weak housing market conditions has broadened.
With values trending lower across most regions of Australia, household wealth is being eroded and the risks of a downturn in consumer spending are heightened.
Also, with economic growth losing momentum, as well as inflation and wages growth remaining below expectations, there are plenty of reasons why the RBA might have considered a cut to the cash rate today.
The consensus from financial markets remains that interest rates will be cut later this year.
We should get a better feel for the RBA’s monetary policy position via the Financial Stability Review, released on April 12, and the Statement on Monetary Policy, released on May 10.
Chances are we will see some downwards revisions to the RBA’s forecasts for economic growth and inflation which could set the scene for lower rates over the second half of the year.
Comments from the RBA:
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased.
Growth in international trade has declined and investment intentions have softened in a number of countries.
In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy.
Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies.
In most advanced economies, unemployment rates are low and wages growth has picked up.
Global financial conditions remain accommodative and have eased recently.
Long-term bond yields have declined further, consistent with the subdued outlook for inflation and lower expectations for future policy rates in a number of advanced economies.
Across a range of markets, risk premiums remain low.
Equity markets have also risen and are being supported by growth in corporate earnings.
In Australia, long-term bond yields have fallen to historically low levels and short-term bank funding costs have moderated further.
The Australian dollar has remained within its narrow range of recent times.
While the terms of trade have increased over the past couple of years, they are expected to decline over time.
The Australian labour market remains strong.
There has been a significant increase in employment and the unemployment rate is at 4.9 per cent.
The vacancy rate remains high and there are reports of skills shortages in some areas.
The stronger labour market has led to some pick-up in wages growth, which is a welcome development.
Continued improvement in the labour market is expected to see some further lift in wages growth over time, although this is still expected to be a gradual process.
The GDP data paint a softer picture of the economy than do the labour market data.
GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018.
Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets.
The drought in parts of the country has also affected farm output.
Offsetting these factors, higher levels of spending on public infrastructure and an upswing in private investment are supporting the growth outlook, as is the steady growth in employment.
The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities.
Conditions remain soft and rent inflation remains low.
Credit conditions for some borrowers have tightened a little further over the past year or so.
At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed.
Growth in credit extended to owner-occupiers has eased.
Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
Inflation remains low and stable.
Underlying inflation is expected to pick up gradually over the next couple of years, although this has been taking a little longer than earlier expected.
The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020.
In the near term, headline inflation is expected to decline because of lower petrol prices earlier in the year, while underlying inflation is expected to remain broadly stable.
The low level of interest rates is continuing to support the Australian economy.
Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.
Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting.
The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.
Comments from the Finder.com.au RBA Survey | 1 in 2 mortgage holders struggle to pay
as cash rate holds:
Almost 5 million Australian mortgage holders live in housing they can only afford to pay for month to month, according to Finder, Australia’s most visited comparison site.
Dropping prices, with further drops expected,may be good news for newcomers to the property market, but nearly half (48%) who currently have a mortgage are struggling.
A recent Finder survey of mortgage holders found that 40% are living month to month, 7% are barely able to make payments and 2% are behind in repayments.
Graham Cooke, insights manager at Finder, said financial hardship is a pervasive problem in Australia.
“Living month to month is a reality for millions of Australians, so if you’re in this situation, you are not alone.
Are you comfortable with your mortgage repayments?
Source: February 2019 Finder consumer survey of 828 homeowners
“A good first step to easing mortgage stress is to see if you can get a better deal.
“Switching to a rate that is half a percentage point lower, like from 4% to 3.5%, could save the average Aussie more than $1,300 a year on their mortgage.
“Savings of any kind will be especially important if we are struck with the larger economic downturn that some are predicting,” Cooke said.
In the latest Finder RBA Cash Rate Survey™, 24% of experts and economists (6/25) said a recession in Australia in the next 12 months was somewhat likely.
“Nearly a quarter of our experts think we might be in for a recession so it’s best to hope for the best and prepare for the worst.
“Do an audit of your finances and see if there are places where you can tighten your belt for the better,” Cooke said.
Despite easing prices in the housing market and recession concerns, the Reserve Bank of Australia (RBA) today announced to hold the cash rate for the 29th consecutive time, an outcome which was accurately predicted by 97% (35/36) of the Finder RBA panel.
Matthew Peter, chief economist at Queensland Investment Corporation, predicted the RBA would hold but said market pressure is building for a cut.
“If the RBA can withstand market pressure for a further six months, many of the current headwinds generating recession fears – trade wars, euro growth, Brexit, Australian housing market downturn – are likely to have receded and the RBA can avoid cutting rates.
“This is important as the RBA risks being trapped, along with the Fed, ECB, BOJ, in a low cash rate setting that limits the effectiveness of monetary policy,” Peter said.
While nearly all experts in the panel expected the hold today, three-quarters (76%) predict that when the RBA does move rates, it will be a decrease.
Cooke said more than half (15/29) of those who made a prediction on the timing of the next move expect it to happen before the end of August.
“The sentiment we’re seeing is that the RBA will likely decrease the cash rate, but not until there’s more economic pressure and clearer direction regarding federal policy,” Cooke said.
While the panel is leaning towards forecasting a decrease in the cash rate, the majority (80%) don’t see this rate falling below 1.00%. Only four economists and experts are predicting it to eventually fall below 1.00%.
Here’s what our experts had to say:
Michael Yardney, Metropole Property Strategists, Hold: “While a drop in interest rates would help increase consumer confidence at a time when falling house prices is affecting confidence and spending, the Reserve Bank will be pleased that Australia’s unemployment rate has hit an eight-year low, giving it more breathing room and the ability to hold off on cutting interest rates.”
Mark Brimble, Griffith University, Hold: “Bias remains to decrease, however it is likely the RBA will hold this month.”
Katrina Ell, Moody’s Analytics, Hold: “There’s no need to tap the easing just yet.”
Matthew Peter, QIC, Hold: “The RBA will remain on the sidelines once again at their April meeting, but market pressure is building for a cut. If the RBA can withstand market pressure for a further 6 months, many of the current headwinds generating recession fears – trade wars, euro growth, Brexit, Australian housing market downturn – are likely to have receded and the RBA can avoid cutting rates. This is important as the RBA risks being trapped, along with the Fed, ECB, BOJ, in a low cash rate setting that limits the effectiveness of monetary policy.”
Mark Crosby, Monash University, Hold: “Indications from the RBA are to hold for longer, labour market surprised on the strong side.”
Alex Joiner, IFM Investors, Hold: “The RBA is cognizant of the recent weakening in the hard and higher frequency data flow, however there has not been enough weakness to serve as a catalyst for it to ease monetary policy in the short term. Importantly, labour market performance is so far holding up very well as while this is the case the RBA can see a path to better wages growth and higher rates of inflation.”
David Bassanese, BetaShares Capital , Hold: “Unemployment is still low.”
Stephen Koukoulas, Market Economics, Decrease: “The economy has slowed, with the per capita GDP recession in the second half of last year probably continuing into 2019. Inflation is low and with the household sector under pressure from falling house prices, some policy stimulus is needed.”
Dr Andrew Wilson, My Housing Market, Hold: “Although momentum and expectations for a near-term rate cut has intensified, the latest labour market data would have bolstered the RBA clear resolve to leave rates on hold at least for April given the Bank’s continued reference to employment data as the key measure for rate consideration.”
Trent Wiltshire, Domain, Hold: “The RBA has shifted to a more dovish stance but are not willing to cut until they see a weaker labour market.”
Jacqueline Dearle, Mortgage Choice, Hold: “Borrowers hoping for a rate cut on April 2nd will be disappointed, with the Reserve Bank of Australia unlikely to shift the official cash rate that’s been anchored at 1.5% since 2016. Despite unemployment remaining low, wages remain low and there has been subdued growth in the Australian economy. In addition, we are now experiencing a “per-capita” recession for the first time in 13 years which may prolong soft household spending. These economic factors, plus a decline in dwelling investment driven by the tightened lending environment will also be weighing on RBA decision making.”
David Robertson, Bendigo and Adelaide Bank, Hold: “Not enough evidence yet of the need to add monetary policy stimulus, however pressure for RBA rate cuts may increase in the H2 as the global economy slows.”
Sean Langcake, BIS Oxford Economics, Hold: “Monetary policy remains very accommodative. Domestically, there has been very little new data in the last month, and none would cause the Bank to change its course.”
Tim Nelson, Griffith University, Hold: “No material change in conditions since last meeting.”
Malcolm Wood, Bank of America Merrill Lynch,Hold: “Growth indicators moderating and inflation below target band.”
John Caelli, ME Bank, Hold: “The Reserve Bank is likely to hold rates for the near future. Despite slowing growth, a recent fall in unemployment numbers provides the RBA more time to assess the data before deciding if a rate cut is necessary.”
Leanne Pilkington, Laing+Simmons, Hold: “There’s still no trigger significant enough to warrant an adjustment to the cash rate at this time. Labor’s proposed changes to negative gearing and CGT have the potential to impact the market considerably so we see the RBA leaving rates steady at least until the Federal election result is decided.”
Brian Parker, Sunsuper, Hold: “RBA will probably wait for more labour market data before deciding whether to ease or not.”
Nerida Conisbee, REA Group, Hold: “While the likelihood of a cut is increasing, this month is still too early. If economic data continues to deteriorate, then we will likely see movement in the second half of the year.”
Michael Witts, ING, Hold: “Ahead of the Budget there is no need for the RBA to take action. In addition the labour market remains strong.”
Janu Chan, St. George Bank, Hold: “The growth outlook is looking increasingly weaker than what the RBA had forecast. However, the labour market is a key focus for the RBA. While it continues to show strength, the RBA would seem reluctant to lower rates.”
Tim Reardon, Housing Industry Association, Hold: “Unemployment – which the RBA has made clear is crucial to their decision-making – remains low.”
Jonathan Chancellor, Property Observer, Hold: “The RBA won’t be rushed into their next move.”
Nicholas Gruen, Lateral Economics, Hold: “Because the economy has stalled, they really should cut, but they are flying by the seat of their pants so can’t really decide what to do.”
Shane Oliver, AMP Capital, Hold: “While the threat to growth and inflation from the housing downturn (via reduced construction activity and negative wealth effects) is such that the RBA should (and might) cut interest rates on Tuesday in order to get in before unemployment starts rising the most likely scenario is that they will continue to hold. The RBA probably needs to see more evidence that the slowdown seen in the second half last year is not just temporary, that consumer spending is under serious threat and that this will drive higher unemployment and lower for longer inflation. It will probably also want to see what sort of fiscal stimulus comes out of the budget and the Federal election outcome. So rate cuts are probably still several months off.”
Noel Whittaker, QUT, Hold: “Because lowering rates would not solve anything.”
Mathew Tiller, LJ Hooker, Hold: “Despite a slight softening, the economy is in relatively good shape, as evidenced by falling unemployment rates, this will see the RBA hold the cash rate steady this month.”
Alison Booth, ANU, Hold: “Economic fundamentals don’t justify a change.”
Alan Oster, NAB, Hold: “Still looking to sort out the different signals from the labour market and activity (e.g. GDP and NAB Survey).”
Peter Haller, Heritage Bank, Hold: “Employment growth is sufficient to offset fears the RBA may have related to falling property prices ”
John Hewson, ANU, Hold: “Still waiting for more data on weakening economy against latest unemployment number.”
Debra Landgrebe, Gateway Bank, Hold: “They have indicated a neutral bias, and we need to see further deterioration or slowing of growth to see them shift to an easing bias.”
Andrew Reeve-Parker, NW Advice Pty Limited, Hold: “Economic data doesn’t require immediate adjustment of rates.”
Other participants: Bill Evans, Westpac; Ben Udy, Capital Economics.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.