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:
At its first meeting of 2019, the Reserve Bank Board kept official interest rates on hold at 1.5%, despite some commentators speculating that the RBA will cut interest rates this year.
The backdrop remains one of a mixed economic picture for Australia, but jobs growth is strong, and unemployment is likely to gradually decline towards 4.5% over the next few years.
The recent inflation release of 1.8% remains slightly below the RBA’s preferred range of 2-3%, but not low enough to warrant an interest rate cut.
It’s Macquarie’s view that Australian interest rates will remain on hold at 1.5% throughout 2019 and into 2020.
Comments from Tim Lawless:
The RBA has looked past the housing downturn which has gathered some momentum over the past three months, to hold the cash rate firm at their first meeting this year.
The hold decision was widely anticipated, considering a subtle uplift in CPI and steady labour market conditions, however financial markets are increasingly leaning towards the next move from the RBA being a cut rather than a hike.
With CoreLogic’s January hedonic index revealing national dwelling values are falling at the fastest rate since the GFC, while Sydney and Melbourne’s rate of decline is now the most rapid since at least the early 1980’s, there is the potential the RBA may be becoming less comfortable with the performance of the housing sector.
Add to this a consistent downtrend in dwelling approvals, weakening consumer sentiment and softer retail trade figures, and it looks like the household sector could start to weigh down economic growth.
The weeks preceding the RBA meeting saw several smaller lenders pushing mortgage rates higher in response to persistently high funding costs, following an average 14 basis point rise in owner occupier mortgage rates since September last year.
If we see mortgage rates rising more broadly, we might see the RBA become more willing to consider a rate cut in an effort to offset higher funding costs and support heavily indebted household balance sheets.
Comments from the RBA:
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economy grew above trend in 2018, although it slowed in the second half of the year.
Unemployment rates in most advanced economies are low.
The outlook for global growth remains reasonable, although downside risks have increased.
The trade tensions are affecting global trade and some investment decisions.
Growth in the Chinese economy has continued to slow, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector.
Globally, headline inflation rates have moved lower due to the decline in oil prices, although core inflation has picked up in a number of economies.
Financial conditions in the advanced economies tightened in late 2018, but remain accommodative.
Equity prices declined and credit spreads increased, but these moves have since been partly reversed.
Market participants no longer expect a further tightening of monetary policy in the United States.
Government bond yields have declined in most countries, including Australia.
The Australian dollar has remained within the narrow range of recent times.
The terms of trade have increased over the past couple of years, but are expected to decline over time.
The central scenario is for the Australian economy to grow by around 3 per cent this year and by a little less in 2020 due to slower growth in exports of resources.
The growth outlook is being supported by rising business investment and higher levels of spending on public infrastructure.
As is the case globally, some downside risks have increased.
GDP growth in the September quarter was weaker than expected.
This was largely due to slow growth in household consumption and income, although the consumption data have been volatile and subject to revision over recent quarters.
Growth in household income has been low over recent years, but is expected to pick up and support household spending.
The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities.
The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices.
Conditions have weakened further in both markets and rent inflation remains low.
Credit conditions for some borrowers are tighter than they have been.
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 to an annualised pace of 5½ per cent.
Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
The labour market remains strong, with the unemployment rate at 5 per cent.
A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years.
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 labour market 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 2018, CPI inflation was 1.8 per cent and in underlying terms inflation was 1¾ per cent.
Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take 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.
Headline inflation is expected to decline in the near term because of lower petrol prices.
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:
For the past two years, about 80% of experts have predicted a hike as the next cash rate move.
This month, only 40% (11/28) did so.
Stephen Koukoulas, managing director at Market Economics said he could see a change happen in as little as a month.
“[The RBA] will acknowledge the economy is weaker than when it last met and will signal a change in bias towards an easing.
“It may wait a month or two before acting on that bias,” Koukoulas said.
Graham Cooke, insights manager at Finder, said of the panelists who put a date on their rate drop, predictions were pretty evenly spread throughout the year from March to November.
“This is the most dramatic shift I have seen in four years of running our cash rate survey.
“Economists are now swinging significantly in favour of a cut this year, but nobody can agree on exactly when this will happen,” Cooke said.
Cooke said that the severity of the housing downturn in recent months was the top reason cited by experts who changed their prediction.
“Along with housing concerns, inflation is still sitting below two per cent, so another cut may be needed to stimulate the economy.
“The only issue with further cuts is that it reduces the ability of the RBA to adapt to softer economic conditions in the future,” Cooke said.
Finder’s Economic Sentiment Tracker has also seen a significant shift.
Positivity regarding employment in Australia fell from 56% in December to just 29% in February.
Economists indicated that, though unemployment is still low, a weakening of job prospects looms on the horizon.
Koukoulas said the economy is on a slower growth path, judging by GDP.
“Looking at many economic factors, it looks like growth will be weaker in the next quarter.
“The labour market tends to lag behind the greater economy by a couple of quarters.
“This trend – combined with lower job vacancy advertising numbers – indicates a risk that employment will be weaker in the first half of this year versus previous years,” Koukoulas said.
Cooke said the results aren’t all gloom and doom.
“With house prices continuing to tumble, the outlook for housing affordability remains strong.
“It’s true some lenders are making out-of-cycle rate hikes – we’ve seen 96 in the loans we compare on Finder so far this year – but not all banks are raising rates. In fact we’ve also seen 69 lenders cut rates.
“The bottom line is if you’re looking to buy now, it’s overwhelmingly a buyer’s market. Use your bargaining power and look for value before you buy,” Cooke said.
Here’s what our experts had to say:
Michael Yardney, Metropole Property Strategists: “The jobs growth figures for December will give the RBA comfort at a time of slower local economic growth and difficult world economic circumstances. With no wages growth and our challenging property markets and the real likelihood of further falls in property values especially in Sydney and Melbourne, the RBA will now have to seriously consider the option of lowering rates this year.”
Shane Oliver, AMP Capital: “While economic data has generally been soft since the last Board meeting in December, it’s unlikely to have been weak enough yet to prompt the RBA to cut rates, particularly given that its bias has still been to raise rates.”
Alison Booth, ANU: “The fundamentals have not yet altered sufficiently to warrant [the RBA] to change.”
John Hewson, ANU: “Data uncertainty and concern economy is slowing.”
Malcolm Wood, Baillieu: “Underlying inflation is below the low end of the RBA’s target band and underlying economic momentum appears to be deteriorating.”
Ben Udy, Capital Economics: “The housing downturn is becoming more severe and will weigh on the economy over 2019. But given the labour market remains in good shape for now, we suspect the RBA will remain on hold for the time being.”
Michael Blythe, CBA: “Reasonable economic backdrop says next move is probably up. But low inflation means no hurry to act.”
Trent Wiltshire, Domain: “The RBA is very reluctant to cut rates. Despite some weak economic data since the December meeting the RBA will maintain a fairly optimistic outlook for the economy.”
Peter Gilmore, Gateway Bank: “Growth is still likely to be above trend.”
Mark Brimble, Griffith Uni: “There is little net direction from indicators, with an overall bias to more support being needed given the out of cycle increases of rates by institutions.”
Tim Nelson, Griffith University: “There is no strong case for an adjustment of monetary policy.”
Peter Haller, Heritage Bank: “Economic conditions have not materially changed since the previous RBA meeting in December and there is no basis for a change at this time.”
Tim Reardon, Housing Industry Association: “GDP remains solid. Unemployment low and no evidence of inflationary pressure.”
Michael Witts, ING: “Despite the increased market talk about the prospect of an easier stance from the RBA, if this scenario is to emerge it is likely to be around mid year. Underlying economic data remains positive for the time being.”
Peter Boehm, KVB Kunlun: “No reason to move rates at this stage.”
Leanne Pilkington, Laing+Simmons: “Some economists now believe the next official rate movement will be down instead of up. The Reserve Bank will need firm justification as a move either way will be heavily scrutinised. We don’t see any justification to adjust rates at this time.”
Stephen Koukoulas, Market Economics: “It will acknowledge the economy is weaker than when it last met and will signal a change in bias towards an easing. It may wait a month or two before acting on that bias.”
John Caelli, ME Bank: “Given low unemployment and wages are starting to rise, the Reserve Bank is unlikely to cut rates in the near term. Likewise, with house prices continuing to fall, tightening credit, and CPI below the target band, a rise in the cash rate is also unlikely. It’s wait and see for now.”
Mark Crosby, Monash University: “While the international situation is deteriorating, there is no reason to move rates at the February meeting.”
Jacqueline Dearle, Mortgage Choice: “As wages continue to flat line and spending appears to be fuelled by a mix of credit and savings, consumers may be entering 2019 with a slightly pessimistic view. Continued low inflation, that’s sitting below Governor Lowe’s target; and the softening property market coupled with the tightened lending environment, only adds to disappointing Australian GDP/economic and global concerns stemming from Trump’s trade war with China. The upcoming federal election also adds a feeling of stasis to lacklustre economic data. In February, a myriad of signposts continue to suggest rates remaining on hold but down the track the next move in the cash rate could well be downward. However this could impact on the Aussie dollar, giving the RBA a lot of big issues to consider as the New Year kicks off.”
Dr Andrew Wilson, My Housing Market: “Although recent data is clearly increasing the chances of a near-term cut in official rates, recent statements by the RBA continue to indicate an ongoing conservative stance on rate settings. This however is likely to change if GDP data to be released on March 6 is again disappointing. In those circumstances the RBA will be motivated to cut rates – particularly prior to the onset of a likely lengthy federal election campaign.”
Matthew Peter, QIC: “The market is now pricing the next move of the RBA to be a 0.25% cut sometime in early 2020 as China slows and the housing market continues to correct. These headwinds are yet to derail the economy, as shown by the strong December labour market data. The RBA will stay on hold until 2020, but failing a crash in China and the housing market, the next move in rates will be up.”
Noel Whittaker, QUT: “There is no way they will increase them with the housing market the way it is – and I can’t see them reducing them.”
Nerida Conisbee, REA Group: “Economic data coming out is still too mixed to make a decision to move rates. While CPI remains low, and GDP growth in September was lower than expected, unemployment is now at just 5%. In Sydney, it is at its lowest rate since 1974.”
Christine Williams, Smarter Property Investing P/L: “The economy is not as strong as expected. Also I believe the RBA is waiting for Royal Commission Report to be released.”
Janu Chan, St.George Bank: “There continues to be strength in the labour market. However, the downside risks for the global economy has increased. The Australian economy is also not growing as strongly as previously thought. The balance of these risks suggests the RBA could tone down its stance of the next move being up but to remain on hold for some time. However, not likely to the extent that the RBA will be ready to lower rates.”
Richard Holden, UNSW: “No chance they raise given housing and inflation.”
Other participants: Bill Evans, Westpac
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