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:
June is the 22nd month that the Reserve Bank has kept interest rates on hold at 1.5%.
A combination of low inflation, reflecting weak wages growth, an elevated Australian dollar and a cooling of house prices are offset against a background of improving non-mining investment, rising solid infrastructure investment and net exports, supported by robust global conditions, has kept the RBA on the sidelines.
Macquarie maintains its view that interest rates are on hold until the first or second quarter of 2019
Comments from Tim Lawless:
Today the Reserve Bank kept the cash rate on hold at 1.5% for a record 20th meeting.
This is of little surprise given some of the underlying weaknesses still prevalent in the Australian economy; a 0.4% decline in the Australian housing market in the year to May, weak wages growth (2.1%), high underemployment (8.3%) and core inflation at the lower bound of the RBA target range (2.0%).
Financial markets are not fully pricing in a rate hike until October 2019.
That is despite the latest RBA forecasts suggesting headline inflation will reach 2.25% by the end of this year and unemployment will fall to 5.25%.
From a housing market perspective, a stable rate environment is positive.
However, there is risk that mortgage rates could rise, regardless of the steady cash rate, due to higher funding costs being faced by lenders overseas.
At the end of May, standard variable mortgage rates for owner occupiers remained at their lowest level since 1965, averaging 5.2% and the average discounted rate is tracking even lower at 4.5%. The average three year fixed rate is lower yet again at 4.15%.
Even if mortgage rates do rise, they are still well below the twenty year average of 6.8%.
Despite mortgage rates being low, activity in the housing market has slowed since 2015. CoreLogic’s latest estimates indicate the number of settled residential property sales is down 7.7% year on year and transaction numbers are 15.1% lower relative to the recent 2015 peak.
Although interest rates are set to remain on hold for the time being, the availability of housing credit has tightened substantially, which is the primary driver of slower housing market activity and falling home values.
The latest figures on housing credit show the monthly rate of growth, at 0.43% is the lowest since June 2013, dragged down mostly by less lending for investment purposes.
Credit policies are likely to remain tight, if not even tighter, with APRA advising lenders to focus more on reducing their exposure to high debt to income loans.
As a result, we expect housing market conditions to continue their slow decline, at least from a macro perspective.
Since peaking in November last year, national dwelling values are down 1.1%.
There are exceptions to this national picture, with dwelling values in Brisbane, Adelaide and Hobart at record highs.
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 has strengthened over the past year.
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.
As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.
Financial markets have been affected by political developments in the eurozone, particularly in Italy.
There are also concerns about the direction of international trade policy in the United States and economic developments in a few emerging market economies.
Long-term bond yields in most major economies have declined recently and there has been some widening of corporate credit spreads.
Overall, though, financial conditions remain expansionary.
Conditions in US dollar short-term money markets have eased recently, although they are tighter than earlier in the year, with US dollar short-term interest rates having increased for reasons other than the increase in the federal funds rate.
The higher rates in the United States have flowed through to higher short-term interest rates in a few other countries, including Australia.
The price of oil has increased over recent months, as have the prices of some base metals.
Australia’s terms of trade are expected to decline over the next few years, but remain at a relatively high level.
The recent data on the Australian economy have been consistent with the Bank’s central forecast for GDP growth to pick up, to average a bit above 3 per cent in 2018 and 2019.
Business conditions are positive and non-mining business investment is increasing.
Higher levels of public infrastructure investment are also supporting the economy.
Stronger growth in exports is expected. One continuing source of uncertainty is the outlook for household consumption.
Household income has been growing slowly and debt levels are high.
Employment has grown strongly over the past year, although growth has slowed over recent months.
The strong growth in employment has been accompanied by a significant rise in labour force participation, particularly by women and older Australians.
The unemployment rate has been little changed at around 5½ per cent for much of the past year.
The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a gradual reduction in the unemployment rate expected.
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 reports that some employers are finding it more difficult to hire workers with the necessary skills.
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.
The Australian dollar remains within the range that it has been in over the past two years.
An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
The housing markets in Sydney and Melbourne have slowed.
Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas.
Housing credit growth has slowed over the past year, especially to investors.
APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.
While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.
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:
People power is the only way to send the big banks a message
As the RBA leaves the cash rate on hold, new research has revealed the average home loan customer could save $82K by switching from a big four bank, to a low rate online lender.
Comparison site RateCity is urging home loan customers unhappy with the behaviour of our major banks to shop around.
New calculations show a family with a $350K loan looking for a fully-featured mortgage, could save up to $82,118 over the life of their loan, by going with the lowest comparable online lender, instead of a major bank.
RateCity spokesperson Sally Tindall said the only way to give the majors a wake-up call is to vote with your feet.
“The big four banks have an incredible 75 per cent share of the home loan market. If you’re fed up with what’s coming out of the Royal Commission, now could be the time to switch.
“Online lenders are increasingly putting fully-featured loan products on the table – at significantly lower rates,” she said.
For example, the big four advertise fully-featured loans for about 4.5 percent, along with a hefty package fee of $395 a year, while some of the smaller lenders are offering fully-flexible loans for as little as 3.49 per cent, complete with a 100 per cent offset account and no ongoing fees.
Low rate online lenders with offset accounts
|Online lender||Product||Rate||Comparison rate|
|Reduce Home Loans||Rate buster home loan||3.49%||3.49%|
|Easy Street||Standard variable home loan||3.49%||3.52%|
|Freedom Loans||Freedom variable home loan||3.49%||3.52%|
|Homestar||Owner-Occupied Home Loan||3.54%||3.58%|
|Virgin Money||Variable rate home loan||3.64%||3.78%|
|Macquarie Bank||Offset home loan||3.69%||3.94%|
|ME Bank||Flexible home loan||3.69%||4.11%|
|loans.com.au||Offset home loan||3.72%||3.74%|
Source: RateCity data
Loans above are owner-occupier paying principal and interest.
Online lenders facts
- Around 30% of lenders in the RateCity database are online.
- Australia’s fifth largest home loan lender is online only (ING).
- Nine of the 10 lowest rate lenders in our database are online lenders.
Tips for selecting an online lender
- Use a comparison site such as RateCity.com.au to research online lenders including ratings for each product.
- Find out what services they offer to field customer enquiries.
- Test out their call centre and online chat service.
- Read online reviews of the lender, particularly any social media feedback they’ve received.
- Make sure they have a comprehensive website, that’s easy to use. If they bury things like fees and charges, it could be a red flag.
Comments from the Finder.com.au RBA Survey:
finder.com.au’s RBA cash rate survey, the largest of its kind in Australia, shows the Reserve Bank of Australia (RBA) is expected to keep the cash rate on ice at 1.5% with all 31 experts and economists predicting this decision.
Here’s what our experts had to say:
Michael Yardney, Metropole Property Strategists: “There’s no reason to change rates. Jobs growth rebounded strongly last month but not enough to stop the jobless rate rising to a 9 month high of 5.6% keeping wages pressure low and rates won’t rise until wages start growing.”
Jordan Eliseo, ABC Bullion: “The RBA will keep rates steady at their upcoming meeting, though we remain convinced the next move will be an interest rate cut. Local economic data remains soft at best, whilst fears over house price declines, and a more subdued environment for private sector credit growth continue to build, fuelled by some of the more troubling revelations from the Banking Royal Commission. The positive narrative around accelerating global growth is also starting to fade, with political uncertainty in Italy (and by extension Europe) unlikely to help.”
Tim Nelson, AGL Energy: “Previous meeting indicated that there wasn’t a strong case for near-term adjustment.”
Shane Oliver, AMP Capital: “Basically nothing has changed. Signs of stronger investment, booming infrastructure spending, strong export volumes and the RBA’s own forecasts argue against a cut but uncertainty around consumer spending, the slowing Sydney and Melbourne property markets, tightening bank lending standards and the slowing Sydney and Melbourne property markets argue against a hike. So no case to move!”
Alison Booth, ANU: “Fundamentals haven’t yet changed sufficiently to warrant altering the interest-rate.”
John Hewson, ANU: “No clear evidence to support a tightening especially given household debt.”
Jonathan Chancellor, Property Observer: “The RBA won’t be wanting to use its lever quite yet, as the economy is in a challenging state of transition. ”
Malcolm Wood, Baillieu Holst: “Sluggish domestic economic data and inflation at the low end of the target range.”
Paul Dales, Capital Economics: “Economic conditions are not strong enough to warrant higher rates and the RBA is becoming concerned that the Banking Royal Commission will result in some households and businesses finding it harder to get credit. The RBA won’t want to raise the price of credit at the same time.”
Saul Eslake, Corinna Economic Advisory: “Data releases since the last Board meeting are unlikely to have changed the Board’s belief that it will be some time before spare capacity in the labour market has declined sufficiently, and economic growth picked up sufficiently, to warrant taking the first step back towards more ‘normal’ monetary policy settings.”
Peter Gilmore, Gateway Bank Ltd: “Some of the fundamentals are beginning to show signs of lining up, but it’s still too soon to move.”
Mark Brimble, Griffith Uni: “Nothing has sufficiently changed.”
Peter Haller, Heritage Bank: “Market conditions do not warrant a change. The RBA is comfortably on hold for the foreseeable future.”
Shane Garrett, Housing Industry Association: “The economy is gathering pace in some areas without generating an increase in inflation – this means that no change in the RBA’s cash rate is warranted for the moment.”
Alex Joiner, IFM Investors: “There’s been no shift in the economic outlook – this is particularly true in the labour market where spare capacity remains and therefore no meaningful acceleration of wages growth should be expected. In this way population growth remaining strong is a double-edged sword for the RBA in so far as it supports economic growth but keeps the unemployment rate from declining. Indeed the RBA does not expect full employment to be achieved over its forecast horizon.”
Michael Witts, ING: “The RBA has indicated that rates will remain on hold for an extended period.”
Leanne Pilkington, Laing+Simmons: “The housing market, from a number of key indicator perspectives, has peaked. Prices in select pockets are easing, clearance rates have dropped, and residential building approvals for April showed a 5% decline, which is more pronounced than most expected. So we’re seeing the market correct at the moment, but in a sustainable, soft-landing way. Raising interest rates prematurely could jeopardise this soft landing, so we expect the RBA to continue the hold pattern.”
Mathew Tiller, LJ Hooker: “There has been no material change in indicators since last month. Property price growth continues to moderate which will be welcome by the RBA. Investor demand has eased with owner occupiers and first home buyers coming back into the market to fill the gap.”
Stephen Koukoulas, Market Economics: “It remains the case that the RBA is downplaying the news of falling house prices, rising unemployment rate, weak wages and inflation. It should cut rates but it won’t.”
John Caelli, ME: “The RBA will want to see inflation and wages improve and lower unemployment before making any changes.”
Mark Crosby, Monash University: “The RBA is likely to remain on hold for the next few months unless wages growth and inflation strengthen. Moderation in asset price growth also lessens the probability of a rate rise.”
Jacqueline Dearle, Mortgage Choice: “The RBA’s decision to hold would be consistent with sustainable growth in the economy, home loan demand remaining stable, and achieving the inflation target over time.”
Dr Andrew Wilson, My Housing Market: “Most recent relevant economic data continues to support steady rates and the Banks conservative stance on monetary policy. Rising spectre of a tariff enhanced-trade war however may require action to lower the AUD which would mean lower official rates.”
Alan Oster, NAB: “Watching for signs of better wages and labour market outcomes. Inflation still low.”
Matthew Peter, QIC: “The rosy global economic backdrop is coming under pressure. Slowing growth momentum, Italian political chaos, uncertainty over Korea, and emerging-market instability in the face of rising interest rates and USD are eroding confidence in the global economy. Domestically, we have the Banking Royal Commission casting a shadow over credit growth. In the face of rising uncertainties, RBA will have not have to think twice before remaining on hold.”
Noel Whittaker, QUT: “There is no compelling reason to increase them – and they certainly won’t be reducing them.”
Nerida Conisbee, REA Group: “The economy still isn’t growing fast enough for the RBA to start moving rates upwards to slow it down.”
Christine Williams, Smarter Property Investing: “Employment has stabilized. APRA’s recommendations have been accepted and rolled out to all major funders.”
Janu Chan, St.George Bank: “Low inflation, ongoing spare capacity, downside risks to housing and the household sector suggests RBA will remain on hold for some time.”
Clement Tisdell, UQ-School of Economics: “The statements of the bank.”
Other participants: Bill Evans, Westpac.
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.