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:
Ben Forrester ( Macquarie) comment:
July is the 23rd month that the Reserve Bank has kept interest rates on hold at 1.5%.
The economy continues to gradually improve, supported by above-trend global growth, however it is simply not improving fast enough to move the RBA Board at this time.
Unemployment remains around 5.5%, wages growth is 2%, average earnings growth is weaker and market determined inflation is below 1% per annum, which remains below the RBA’s preferred two to three per cent range.
Macquarie now believes the RBA won’t need to lift the cash rate until early 2020.
Comments from Tim Lawless:
Economic conditions remain reasonably stable, housing market growth continues to slow, household debt is at record highs, and inflation remains around the lower end of the RBA target range.
With this scenario as a backdrop, the hold decision today from the RBA was widely anticipated.
It is looking increasingly as if the cash rate will hold at record lows throughout 2019; this is the view of financial markets where the ASX cash rate yield curve indicates the cash rate will remain on hold until at least November 2019.
However, focus is now moving to mortgage rates, where we are increasingly seeing upwards pressure from overseas funding costs.
Already, smaller banks and non-banks, who are generally more exposed to wholesale debt costs, are pushing interest rates higher for select mortgage products.
Larger banks, who are more reliant on domestic deposits to fund their home loans, have less exposure to higher funding costs.
However it is likely margin pressures are becoming evident across the big end of town as well.
Despite these early signs of some upwards pressure on mortgage rates, average variable rates remain almost 120 basis points below their decade average of 6.4%.
Borrowers, particularly owner occupiers with principal and interest loans, should continue to expect a low mortgage rate over the medium term.
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.
The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.
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.
There have also been strains in a few emerging market economies, largely for country-specific reasons.
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.
In Australia, short-term wholesale interest rates have increased over recent months.
This is partly due to developments in the United States, but there are other factors at work as well.
It remains to be seen the extent to which these factors persist.
The recent data on the Australian economy continue to be consistent with the Bank’s central forecast for GDP growth to average a bit above 3 per cent in 2018 and 2019.
GDP grew strongly in the March quarter, with the economy expanding by 3.1 per cent over the year.
Business conditions are positive and non-mining business investment is continuing to increase.
Higher levels of public infrastructure investment are also supporting the economy.
One continuing source of uncertainty is the outlook for household consumption.
Household income has been growing slowly and debt levels are high.
Higher commodity prices have provided a boost to national income recently.
Australia’s terms of trade are, however, expected to decline over the next few years, but remain at a relatively high level.
The Australian dollar has depreciated a little, but remains within the range that it has been in over the past two years.
The outlook for the labour market remains positive. Strong growth in employment has been accompanied by a significant rise in labour force participation.
The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment.
A gradual decline in the unemployment rate is expected, after being steady at around 5½ per cent for much of the past year.
Wages growth remains low.
This is likely to continue for a while yet, although the stronger 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 increasing reports of skills shortages in some areas.
Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing.
A gradual pick-up in inflation is, however, expected as the economy strengthens.
The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
Nationwide measures of housing prices are little changed over the past six months.
Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets.
Housing credit growth has declined, with investor demand having slowed noticeably.
Lending standards are tighter than they were a few years ago, with APRA’s supervisory measures helping to contain the build-up of risk in household balance sheets.
Some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time.
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 RBA has left the cash rate on hold at 1.50 per cent today yet as many as 362,800 home loan customers will face higher repayments this month as lenders continue to hike home loan rates out of cycle.
RateCity’s database shows 13 lenders have increased some of their home loan rates in recent weeks by as much as 40 basis points.
Sally Tindall, spokesperson for RateCity.com.au, said that with home loan rates as low as 3.44 per cent, now is the time to refinance.
“Hundreds of thousands of home loan customers about to be hit with higher repayments this month, even though the RBA has left the cash rate on hold in July,” she said.
“If you take an average rate hike of 25 basis points, for a $300,000 home loan you’re looking at paying an extra $540 per year – that’s not small change.
“For the people who bought at the peak of the market and are overstretched already, they are not going to be able to find those dollars easily.
“The good news is that these hikes only apply to the variable rate customers and those borrowers can switch without having the excessive break fees that fixed rates have.
“If you are one of the many borrowers that has had their rates increased, then go and have a look at what other lenders are offering and then call your bank and tell them you want a discount.
“If they aren’t prepared to budge and waive the rate hike, then make the switch to one of those other lenders.”
Comments from the Finder.com.au RBA Survey:
Australia’s top economists were united in forecasting the cash rate would be held, but were divided on their views of how banks treat businesses
Here’s what our experts had to say:
Michael Yardney, Metropole Property Strategists: “The RBA will hold interest rates steady because there has been no change to the economic outlook since last month. In fact rates are unlikely to rise until wages rise and that seems quite some way off.”
Jordan Eliseo, ABC Bullion: “The RBA’s view on monetary policy is clearly changing, with a more dovish tone at the very least pushing back the timeframe for rate hikes, if not already opening the door to an eventual rate cut, which is still our base case in the coming months. Growth figures and employment levels are still reasonable though, so they’ll continue to take a “wait and see” approach for now.”
Tim Nelson, AGL Energy: “No change in underlying data from previous month.”
Shane Oliver, AMP Capital: “There is no strong case to move either way just now. Signs that mining investment may bottoming, strengthening non-mining investment, surging infrastructure spending and rising export volumes all argue against a rate cut but peaking housing investment, uncertainty around consumer spending, continuing weak wages growth and inflation, falling Sydney and Melbourne property prices, tightening bank lending standards and global uncertainty around trade all argue against a hike. So it’s best for the RBA to remain on hold – for the 23rd month in a row.”
Alison Booth, ANU: “Fundamentals don’t yet warrant any change.”
Malcolm Wood, Baillieu Holst: “Inflation at low-end of band; housing market rolling over; consumption uncertainties.”
Richard Robinson, BIS Oxford Economics: “There are no inflationary pressures, while house prices are now undergoing an orderly and much needed downward adjustment.”
Paul Dales, Capital Economics: “There are still very few signs that inflation is going to rise back to the middle of the RBA’s 2-3% target. And more recently, the RBA is becoming more concerned about the hit to the economy from the global trade dispute and domestic Banking Royal Commission.”
Saul Eslake, Corinna Economic Advisory Pty Ltd: “The RBA will not have changed its overall view of the outlook for the Australian economy sufficiently to warrant either raising or lowering the cash rate. Economic growth (Q1 GDP) was a bit stronger than the RBA had been anticipating at the last meeting – and is arguably now back to its ‘trend’ pace. But the RBA’s commentary on prospects for wages growth seems to have become a bit more pessimistic.”
Tim Moore, CUA (Credit Union Australia): “Until we see a strong trend in unemployment dropping toward the magic 5% level, we will continue to see low level inflation and low wage growth, therefore the RBA remaining on the sidelines. Whilst the RBA have clearly communicated their next move to be up, they have also caveated this with comment that they do not see this anytime soon.”
Peter Gilmore, Gateway Bank Ltd: “Key economic fundamentals are still short of the levels the RBA traditionally needs to trigger a rise.”
Peter Haller, Heritage Bank: “There is no justification for a rate change at the present time.”
Shane Garrett, Housing Industry Association: “No grounds for monetary intervention in the short term.”
Alex Joiner, IFM Investors: “Despite good headline economic growth data the RBA clearly requires better wages growth to underpin what is still a weak inflationary pulse, consumer spending and household balance sheets.”
Michael Witts, ING: “No change on the horizon from the RBA, the next move will be up built a long way away.”
Leanne Pilkington, Laing+Simmons: “The hold pattern remains appropriate in the current climate. Global economic forces, the widening wage gap between older and younger working Australians, and outcomes of the Banking Royal Commission might all impact the RBA’s outlook in the near term, but for now it’s important that interest rates remain steady.”
Stephen Koukoulas, Market Economics: “It has told the market it will be on hold until it has more economic information.”
John Caelli, ME: “The RBA has indicated they are in no rush to change policy.”
Mark Crosby, Monash University: “RBA has signalled that it will hold for the next few meetings, unless a significant shock hits the economy.”
Dr Andrew Wilson, My Housing Market: “There remains no clear case for change, particularly given clearly weakening Sydney and Melbourne housing markets, continuing mixed local economic data and concerns over the global economy and rising trade barriers.”
Alan Oster, NAB: “Waiting regarding data on wages and the consumer. Need lower unemployment rate. Inflation no pressure yet.”
Matthew Peter, QIC: “Philip Lowe has made it quite clear that the Bank will not be raising rates while annual wage growth languishes around 2%. He also has made it clear that there is no chance of a rate cut while household debt and house price remain elevated. The RBA can’t cut and they can’t hike.”
Nerida Conisbee, REA Group: “Businesses are confident but consumers aren’t. Until this turns around, I think it is unlikely we will see an interest rate rise.”
Christine Williams, Smarter Property Investing: “As much as the housing market has seemed to retract slightly there has been no major impact on the buying pool within the $500-$850K range. This range suits most first home buyers. Our unemployment rate has reduced slightly with the national rate around 6%. Whilst we are at this rate I doubt interest rates will move.”
Janu Chan, St.George Bank: “Ongoing strong conditions in the business sector and the high level of public infrastructure spending will support economic activity and employment growth. However, there is ongoing spare capacity in the labour market and wage growth and inflation is expected to remain low.”
Brian Parker, Sunsuper: “Growth is improving, but not fast enough to deliver the much needed improvement in labour force underutilisation and wages growth.”
Clement Tisdell, UQ-School of Economics: “No significant change in Australia’s economic situation.”
Mark Brimble: “We’re not likely to see a movement for a long time, and the direct of that movement will depend on international markets so it’s too early to tell which way it will go.”
Other participants: Bill Evans, Westpac. Noel Whittaker, QUT. Jacqueline Dearle, Mortgage Choice.
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