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:
Key data released in the past few weeks continues to paint a mixed picture for our economy, keeping the RBA on the sidelines and maintaining official rates on hold at 1.5%.
A cooling of house prices, slowing construction approvals, and household activity limited by weak wages and high debt levels, is allowing the RBA plenty of time to consider an adjustment in monetary policy at a future date.
It’s Macquarie’s view that rates will now stay on hold until 2020.
Comments from Tim Lawless:
The decision to keep the official interest rate on hold marks the two year anniversary of the last change to the cash rate by the RBA; the longest period of interest rate stability on record.
The steady rate setting has a lot to do with stubbornly low inflation, record high household debt, a slack labour market and, more recently, falling dwelling values.
Financial markets continue to expect that the cash rate will remain unchanged until at least January 2020.
While the cash rate has remained stable, mortgage rates have been tweaked, the extent to which depends on the borrower type and loan product.
Over the same period of cash rate stability, the average standard variable mortgage rate has actually reduced by 5 basis points for owner occupiers and increased by 30 basis points for investors.
Three years fixed rates for investors have increased by ten basis points and discounted variable rates are up 40 basis points for investment loans.
Additional mortgage rate premiums are payable for borrowers who aren’t paying down their principal.
Clearly the stability in the cash rate hides a deepening complexity in mortgage products brought about by the heightened level of regulation and focus from both lenders and policy makers on improving credit quality.
Despite the housing market headwinds from tighter credit conditions, the prospect of mortgage rates remaining reasonably stable should help to keep a floor under housing demand.
Comments from the RBA:
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economic expansion is continuing.
A number of advanced economies are growing at an above-trend rate and unemployment rates are low.
Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector.
Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets.
One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.
Financial conditions remain expansionary, although they are gradually becoming less so in some countries.
There has been a broad-based appreciation of the US dollar over recent months.
In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June.
These higher money-market rates have not fed through into higher interest rates on retail deposits.
Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.
The Bank’s central forecast for the Australian economy remains unchanged.
GDP growth is expected to average a bit above 3 per cent in 2018 and 2019.
This should see some further reduction in spare capacity.
Business conditions are positive and non-mining business investment is continuing to increase.
Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports.
One continuing source of uncertainty is the outlook for household consumption.
Household income has been growing slowly and debt levels are high.
The drought has led to difficult conditions in parts of the farm sector.
Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices.
While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level.
The Australian dollar remains within the range that it has been in over the past two years.
The outlook for the labour market remains positive.
The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment.
Employment growth continues to be faster than growth in the working-age population.
A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent.
Wages growth remains low.
This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time.
Consistent with this, the rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas.
The latest inflation data were in line with the Bank’s expectations.
Over the past year, the CPI increased by 2.1 per cent, and in underlying terms, inflation was close to 2 per cent.
The central forecast is for inflation to be higher in 2019 and 2020 than it is currently.
In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1¾ per cent.
Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low.
Housing credit growth has declined to an annual rate of 5½ per cent.
This is largely due to reduced demand by investors as the dynamics of the housing market have changed.
Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets.
There is competition for borrowers of high credit quality.
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 holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
Comment from Ratecity.com.au:
The Reserve Bank has kept the cash rate on hold at 1.5 per cent today, marking two years since official rates last moved.
Meanwhile two of the big four banks, Commonwealth Bank and ANZ, along with 19 other lenders, have slashed interest rates on fixed home loans as competition among lenders heats up.
RateCity.com.au shows lenders have dropped fixed interest rates by up to 72 basis points on more than 120 products.
Commonwealth Bank cut its fixed rates by 10 basis points, while ANZ cut some of its fixed rates up to 24 basis points.
Sally Tindall, research director at RateCity, said banks were slashing fixed rates in a bid to win market share.
“Growth in home lending has started to hit the brakes, while non-bank lenders are gaining traction.
As a result, banks are throwing everything at fixed rates to keep new customers coming through the door,” she said.
“This makes it the perfect environment for refinancers, particularly if you have a bit of equity up your sleeve, but only if you’re willing to fix.
“While the cash rate is unlikely to increase before 2020, more than half a million variable rate customers have already been hit with higher rates due to cost of funding pressures, with more hikes expected to follow.
“If you like the security of knowing your rate won’t go up, then a low fixed rate could be the answer you’re looking for.
“With rates at near-record lows, now wouldn’t be the silliest time to fix.”
Comments from the Finder.com.au RBA Survey:
58% of experts and economists think the big four banks will adjust mortgage rates out-of-cycle.
However, just 35% of panellists believe homeowners should fix their rate.
The cash rate holds at 1.5% for August 2018.
Here’s what our experts had to say:
Michael Yardney, Metropole Property Strategists (Hold): “There is no reason to alter interest rates. Our weakening housing markets, low inflation rate and soft wages growth suggest no rise in rates is imminent. If anything this would dampen already sluggish consumer confidence.”
Jordan Eliseo, ABC Bullion (Hold): ”The RBA will remain on hold for some time. Whilst they are no doubt concerned regarding continued low levels of inflation and wage growth, overall performance in the Australian economy suggests the most prudent course of action is to stay the course as regards interest rate settings. Lower house prices, and the potential for a negative “wealth effect” will be on their radar, but it will be some time before they next move.”
Tim Nelson, AGL Energy (Hold): “Private non-mining business investment is strong, inflation has remained low and household debt and housing conditions indicate that a steady approach is likely. ”
Shane Oliver, AMP Capital (Hold): “Growth has picked up a bit and the RBA is optimistic, but inflation and wages remain too low, property prices are falling in Sydney and Melbourne, the housing construction cycle has peaked and uncertainty remains around the outlook for consumer spending. So it’s way too early to hike, but hard to mount a case for a cut either right now. So best to remain on hold.
Alison Booth, ANU (Hold): ”Fundamentals don’t yet suggest the interest rate needs to change.”
John Hewson, ANU (Hold): “Household debt/global uncertainty.”
Malcolm Wood, Baillieu Holst (Hold): ”Need for ongoing policy support given households under pressure, easing stages of a housing downturn, China slowdown and underlying inflation around low-end of target”
Paul Dales, Capital Economics (Hold): “The RBA is increasingly worried that financial conditions will be tightened by banks raising their mortgage rates and using stricter credit criteria, so it will keep interest rates at 1.5% so as not to make things worse.”
Michael Blythe, CBA (Hold): “Low inflation and lack of wages growth indicates no hurry to act on rates.”
Saul Eslake, Corinna Economic Advisory (Hold): “Although overall economic growth is now close to trend, unemployment (and especially underemployment) remain higher than the RBA wants, while the June quarter CPI data showed underlying inflation still running below the lower bound of the RBA’s target range. And most measures of wage inflation remain at or close to historic lows. It’s difficult to envisage the RBA Board altering its conclusion that the next movement in rates is some way off. ”
Peter Gilmore, Gateway Bank (Hold): “Glacial change in local fundamentals and global volatility will see the RBA sit tight.”
Mark Brimble, Griffith Uni (Hold): “Material uncertainty in the economy.”
Peter Haller, Heritage Bank (Hold): ”There is no rationale for the RBA to change rates at this point in time.”
Shane Garrett, Housing Industry Association (Hold): “Australia’s economy is creating healthy volumes of new jobs, although the majority of these are part time. Inflation and wage pressures are under control, while dwelling prices have softened in both Sydney and Melbourne. This is not the time for interest rates to rise. The likelihood that the next move will be downward is growing.”
Alex Joiner, IFM Investors (Hold): “The data flow hasn’t improved materially enough over recent months to warrant the RBA shifting its current cautiously optimistic bias.”
Andrew Armstrong, ING Bank (Australia) Limited (Hold): ”No material change in economic conditions from prior period.”
Leanne Pilkington, Laing+Simmons (Hold): “Weak underlying inflation strengthens the case for the RBA to leave rates on hold. The housing market requires this stability at the moment.”
Mathew Tiller, LJ Hooker (Hold): ”Economic conditions don’t support any movement in the cash rate at present.”
Stephen Koukoulas, Market Economics (Hold): ”The RBA will hold rates because it continues to place a higher priority on reducing house prices than meeting its inflation target and tackling the slack in the labour market. It should be cutting interest rates.”
John Caelli, ME (Hold): “Despite strong employment data, the weaker than expected CPI figures together with subdued wage growth and concerns around inflation and household debt levels, will likely keep rates on hold.”
Mark Crosby, Monash University (Hold): “RBA has strongly signalled that rates will remain on hold for at least a few months, and most likely into 2019.”
Jacqueline Dearle, Mortgage Choice (Hold): ”I expect the RBA to hold the official cash rate at 1.5% in August 2018 because despite good global economic growth, the domestic economy is below expectations with wages and inflation likely to remain low. New tightened lending standards and increased scrutiny around borrower living expenses coupled with cooling property prices will also play a factor in the RBA’s decisions to hold.”
Dr Andrew Wilson, My Housing Market (Hold): ”Latest data strengthens case for continuing steady outlook for official interest rates with underlying June quarter inflation low and stagnant. Wages Index data to be released soon may fuel growing concerns that the economy may require more stimulus to offset chronically low consumption, rising fuel and energy costs and the emerging prospect of a trade barriers.”
Alan Oster, Nab (Hold): ”Still too early to move. Wages need more momentum House prices also flat to falling.”
Jonathan Chancellor, Property Observer (Hold): ”There’s nothing but watching and waiting on the RBA agenda for the time being.”
Matthew Peter, QIC (Hold): “The June quarter CPI report has buried recent commentary that the RBA should be considering a rate increase.”
Noel Whittaker, QUT (Hold): “No reason to move.”
Jo Horton, St.George Bank (Hold): ”Economic growth is solid, business conditions are elevated and jobs growth is strong. There are risks to the global economy, including trade concerns and the domestic economy, including housing. There are downside risks emanating from a tightening in lending standards and recent upward pressure on wholesale funding costs, as recently highlighted by the RBA. This suggests the RBA will leave interest rates on hold for an extended period.”
Richard Holden, UNSW (Hold): ”Low inflation; low wage growth; housing price pressure.”
Clement Tisdell, UQ-School of Economics (Hold): “High level of debt and low rate of increase in prices.”
Bill Evans, Westpac (Hold): “The June Quarter CPI, and the revisions to our inflation forecasts are consistent with an RBA on hold out to the end of 2019.”
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