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 RBA surprised the market and most economists, not by raising official interest rates, but by raising their 2019 economic growth forecast.
Earlier in November, the RBA raised their forecast for Australia’s economic growth outlook to 3 ½% for 2019, well above broad consensus.
Despite citing improving unemployment at 5%, inflation at 1.9% and easing house prices, the RBA has kept rates on hold at 1.5% at its last meeting for 2018, a level that will support sustainable growth.
Looking to 2019, we see more of the same and despite some challenges, it’s our view that overall momentum will continue.
Comments from Tim Lawless:
The longest period of interest rate stability on record has extended out another month, with the RBA keeping the cash rate on hold at 1.5% where it has remained since they cut the cash rate by 25 basis points in May and August of 2016.
Considering the diversity of economic conditions, the hold decision comes as no surprise.
Labour markets are improving, but wages growth remains sluggish and inflation has softened.
It’s a bit harder to gauge the RBA’s view on housing market conditions, with the RBA continuing to call out weakening conditions in Sydney and Melbourne.
CoreLogic data to the end of November highlighted that the Sydney market has already recorded a 9.5% decline in values since peaking in July last year and will likely surpass the previous record peak to trough decline of 9.6% which was set during the last recession between 1989 and 1991.
Despite this weakness in the largest cites, dwelling values in Sydney remain 41% higher than they were five years ago and Melbourne values are still 38% higher both of which show five year growth rates well in excess of most other capital city markets.
Additionally, five of the eight capital cities have posted a capital gain over year to date however, from a macro view they have much less of an influence on the national figures than Sydney and Melbourne do.
To date we haven’t seen the housing downturn impacting on household consumption or saving, however this is likely to be a key factor the RBA will be monitoring.
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 and unemployment rates in most advanced economies are low.
There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions.
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 due to the earlier lift in oil prices and faster wages growth.
A further pick-up in core inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus.
Financial conditions in the advanced economies remain expansionary but have tightened somewhat.
Equity prices have declined and credit spreads have moved a little higher.
There has also been a broad-based appreciation of the US dollar this year.
In Australia, money-market interest rates have declined, after increasing earlier in the year.
Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans.
The Australian economy is performing well.
The central scenario is for GDP growth to average around 3½ per cent over this year and next, before slowing in 2020 due to slower growth in exports of resources.
Business conditions are positive and non-mining business investment is expected 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.
Growth in household income remains low, debt levels are high and some asset prices have declined.
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 and have been stronger than earlier expected.
This has helped boost national income.
Most commodity prices have, however, declined recently, with oil prices falling significantly.
The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis.
The outlook for the labour market remains positive.
The unemployment rate is 5 per cent, the lowest in six years.
With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely.
The vacancy rate is 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.
The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.
Inflation remains low and stable.
Over the past year, CPI inflation was 1.9 per cent and in underlying terms inflation was 1¾ per cent.
Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual.
The central scenario is for inflation to be 2¼ per cent in 2019 and a bit higher in the following year.
Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low.
Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend.
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 to an annualised pace of 5–6 per cent.
Mortgage rates remain low, with competition strongest 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.
Comments from the Finder.com.au RBA Survey:
Current and prospective property owners in Sydney and Melbourne should prepare for a big drop in housing value, according to finder.com.au, the site that compares virtually everything
Seventy-eight percent of those surveyed expect the next rate change, whenever it does happen, to be an increase, consistent with last month.
Here’s what our experts had to say:
Michael Yardney, Metropole Property Strategists: “While the economic data suggests an improving economy, wages growth is slow and our property markets are slumping. The many mixed signals means the RBA will maintain the official interest rate on hold at 1.5%.”
Alan Oster, NAB: “Wages still sluggish and consumer [is] nervous.”
Alex Joiner, IFM Investors: “The RBA have become marginally more confident in its assessment of the economy recently however these expectations are still some way off in being observed in the economy – this again supports the assertion that interest rate hikes are some way off yet.”
Alison Booth, ANU: “The fundamental still don’t want any change.”
Clement Tisdell, UQ-School of Economics: “No good reason to alter. Any rise in interest rates is problematic given the high level of indebtedness of Australian households.”
Dr Andrew Wilson, My Housing Market: “On hold. November was last chance for effective rate cut to stimulate stagnant incomes and consumption ahead of what is likely to be another underwhelming Xmas retail period. Also last month was last chance to stem increasing downward momentum in house prices – likely also to ironically be of growing concern now to RBA given its impact on consumer sentiment and sharply reduced economic activity from the property and finance sectors. So set to be on hold for the foreseeable future with the Bank unlikely to cut ahead of the growing likelihood of a downturn in the global economy.”
Geordan Murray, HIA: “There is still insufficient evidence of inflationary pressures to justify a rate hike. Declining home prices in Sydney and Melbourne, particularly given the magnitude of the falls, would ordinarily trigger calls to cut rates. This time around the RBA is not likely to be compelled to change policy settings based on home prices. The recalibration of home prices is due to homeowners being forced to deleverage due to both APRA’s interventions in the mortgage market and the credit squeeze initiated by the banks.”
Jacqueline Dearle, Mortgage Choice: “With little change in inflation and wage growth, plus a positive outlook for the labour market, the economic backdrop suggests the Reserve Bank of Australia will hold the official cash rate at 1.5% in December. Looking ahead, Governor Lowe has said that interest rates in Australia will rise, ‘at some point’, highlighting the need for borrowers to take a closer look at their financial situation and talk to an expert to ensure they are getting the best deal on their home loan.”
Janu Chan, St. George Bank: “RBA rhetoric continues to suggest rates remaining on hold. Although unemployment is continuing to fall, ongoing slow wage growth and low inflation suggests little need to move rates anytime soon.”
John Hewson, ANU: “Economy now slowing and household debt constraint.”
Jonathan Chancellor, Property Observer: “The bank will now see how the new year unfolds. There is no immediate reason to do anything just yet.”
Jordan Eliseo, ABC Bullion: “Despite the heightened concern regarding falling house prices and the knock on effect it will have across the economy, the RBA will hold into the first half of 2019 at the latest. Actual economic data is still relatively strong, though we expect the economy will hit a rougher patch next year, with the RBA eventually trimming rates toward 1%.”
Leanne Pilkington, Laing+Simmons: “We see the official cash rate remaining at its current level through the first half of 2019. Subdued housing transaction activity and price declines in some markets make an interest rate increase in the near term an unnecessary risk. A strong labour market will be a key factor supporting the economy as we look to the new year.”
Malcolm Wood, Baillieu: “Inflation below target, housing downturn and market volatility.”
Mark Brimble, Griffith Uni: “No reason to provide any tightening. With actual rates in the market moving up and a not so positive estimate of the summer retail season, if anything there is more of a case for stimulus.”
Mark Crosby, Monash University: “Despite pressure to raise, the RBA will wait until the new year before yielding. International uncertainty may slow down the pace of rate increases in the US, but the Fed and other central banks are still likely to be raising in the new year, making it easier for the RBA to follow suit.”
Matthew Peter, QIC: “The RBA managed to raise substantially their growth outlook, while leaving their inflation outlook largely unchanged. Meanwhile, employment growth powers on and wage growth grinds higher. Unless the housing market crashes, the RBA will be raising rates before the end of 2019; long before the market currently expects.”
Michael Blythe, CBA: “Low inflation and weak wages growth.”
Michael Witts, ING Bank: “It is a matter of the RBA being comfortable with the current state and outlook for the Australian economy.”
Nerida Conisbee, REA Group: “There are some really positive economic indicators out there at the moment. In particular, the unemployment rate is very low and this should lead to wages growth. Nevertheless, at this stage, I believe they will hold and review when they meet up again next year.”
Nicholas Gruen, Lateral Economics: “They won’t cut, though there’s a case they should. They’d rather raise, but they’ve not telegraphed it.”
Noel Whittaker, QUT: “There is no desperate urgency to increase rates and they certainly will not drop.”
Peter Gilmore, Gateway Bank: “Whilst employment is strengthening, inflation remains moderate. Global market volatility will weigh on the RBA’s decision.”
Peter Haller, Heritage Bank Limited: “The RBA will not increase the cash rate while inflation and inflation expectations remain low.”
Richard Holden, UNSW: “Still missing inflation target. Wages growth weak.”
Saul Eslake, Corinna Economic Advisory: “Although the RBA remains optimistic on the outlook for economic growth and unemployment, it still sees inflation returning only ‘gradually’ to the bottom of its 2-3% inflation target. And some of its recent commentary appears to indicate slightly greater near-term concerns with regard to the possible consequences of declining property prices and greater risk aversion on the part of lenders. All of this suggests that an increase in rates is still some way off.”
Shane Oliver, AMP Capital: “The RBA remains between a rock and a hard place. Strong infrastructure spending, improving non-mining investment, a lessening drag from falling mining investment and a fall in unemployment to 5% are all good news. But against this the housing cycle has turned down, this will act as a drag on housing construction and consumer spending via a negative wealth effect, wages growth remains weak, inflation is below target and share market volatility is highlighting risks to the global outlook. So yet again the RBA will remain on hold.”
Tim Moore, CUA: “The RBA appears to be comfortable with current monetary policy setting, with the next move more likely to be up than down. The RBA is likely to wait for more evidence that wages growth is rising before increasing interest rates.”
Tim Nelson, Griffith University: “No material change since last meeting.”
Trent Wiltshire, Domain: “The RBA is comfortable with where the cash rate is and the trajectory of the economy. The unemployment rate has fallen faster than expected and growth is robust. The main concerns are whether wages growth will pick-up and how falling house prices will affect consumer spending and the construction sector.”
Other participants: Bill Evans, Westpac; Marcel Thieliant, Capital Economics; Stephen Koukoulas, Market Economics
Bank rates around the world start to rise as the RBA holds firmly in neutral
The RBA has today held the cash rate at 1.50 per cent for the last meeting of 2018, with potential for the pattern to be repeated in 2019.
The RBA’s trend of holding rates puts Australia out of step with a number of key economies around the world, as central banks start to lift rates, a decade after the global financial crisis.
Ten of the countries in the G20 today have higher benchmark rates compared with the start of the year.
Most notably the United States has hiked three times this year and is tipped to lift for a fourth in the middle of this month.
Sally Tindall, research director at RateCity.com.au, said it was doubtful the RBA would follow in the United States’ footsteps in the new year.
“The RBA has officially shut the door on a hike to the cash rate in 2018 and is unlikely to consider the possibility until late 2019,” she said.
“The RBA’s hands will be tied until at least after the next Federal election. In the meantime, inflation, wages growth and household debt have a lot of work to do.
“The good news is that Australian home owners can rest easy this Christmas. That said, now is the perfect time to stash a bit of money into the mortgage, instead of putting it all under the Christmas tree.”
Benchmark interest rates around the world
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