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:
Economic data released over the past month indicates an improving economy, however there is enough contrasting information to keep the RBA on the sidelines and maintain the official interest rate on hold at 1.5%.
The unemployment rate surprised this past month coming in at 5%, down 0.25% on September.
An improving labour market is reflective of increasing business investment, and as the labour market tightens and the demand for skilled jobs rises.
However while wages growth and inflation is subdued in Australia, it is Macquarie’s view that interest rates will remain on hold until 2020.
Comments from Tim Lawless:
Although the cash rate remained on hold for a record 27th month, it’s important to note that mortgage rates to investors are up as much as fifty basis points over the same time frame.
That’s the equivalent of two cash rate hikes, and variable rates for owner occupiers have increased by 15 basis points over the past two months alone.
The rise in mortgage rates, particularly for investors who are now paying a 55 basis point premium over owner occupiers, together with tighter lending conditions more broadly, has been a key factor in taking the heat out of the housing market.
Despite relatively strong economic conditions, with GDP running at a six year high and unemployment at a six year low, the recent core inflation reading was tracking at 1.7% and wages growth remains subdued.
The ongoing fall in Australian dwelling values is also likely to be weighing more heavily on the RBA’s deliberations, with CoreLogic indices showing the housing market downturn is becoming more broad based, with most regions around Australia showing a clear slowdown in growth rates, if not declining values.
Although mortgage rates have edged higher over recent months, the cost of debt remains at the lowest levels since the 1960’s.
With the cash rate remaining on hold for the foreseeable future and funding cost pressures easing, we are likely to see mortgage rates remain close to their current levels which should help to keep a floor under housing demand, especially with housing affordability now improving and labour markets strengthening.
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 due to both higher oil prices and some lift in wages growth.
A further pick-up in inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus.
One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.
Financial conditions in the advanced economies remain expansionary but have tightened somewhat recently.
Equity prices have declined and yields on government bonds in some economies have increased, although they remain low.
There has also been a broad-based appreciation of the US dollar this year.
In Australia, money-market interest rates have declined recently, 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.
Over the past year, GDP increased by 3.4 per cent and the unemployment rate declined to 5 per cent, the lowest in six years.
The forecasts for economic growth in 2018 and 2019 have been revised up a little.
The central scenario is for GDP growth to average around 3½ per cent over these two years, 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.
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 on a trade-weighted basis, although it is currently in the lower part of that range.
The outlook for the labour market remains positive.
With the economy growing above trend, a further reduction in the unemployment rate is expected to around 4¾ per cent in 2020.
The vacancy rate is high and there are reports of skills shortages in some areas.
Wages growth remains low, although it has picked up a little.
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.
These outcomes were in line with the Bank’s expectations and were influenced by declines in some administered prices due to changes in government policies.
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.
Growth in credit extended to owner-occupiers has eased but remains robust, while demand by investors has slowed noticeably as the dynamics of the housing market have changed.
Credit conditions are tighter than they have been for some time, although mortgage rates remain low and there is strong 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.
Comments from the Finder.com.au RBA Survey:
Experts and economists were asked how much they expect property values to dip by the end of 2019.
This follows last month’s prediction of 8% drops to house prices in eastern capitals by 2021.
Seventy-eight percent of those surveyed expect the next rate change, whenever it does happen, to be an increase.
This belief is consistent with the 85% who held this prediction last month.
Here’s what our experts had to say:
Michael Yardney, Metropole Property Strategists: “The RBA must be a little worried with the current crisis in consumer confidence. If anything it may want to err on the side of caution and lower rates, but it is likely to take a wait and see approach.”
Alan Oster, NAB: “Still waiting to see what happens to wages and the consumer.”
Alex Joiner, IFM Investors: “Inflation data for the third quarter came in slightly weaker than the market expected and decelerated again away from the bottom of the RBA’s target band. This is broadly in line with the Bank’s expectation however underscores that despite good economic growth the inflationary pulse in the economy is weak. In the absence of either a material pick up in wage growth and inflation the RBA simply has no reason to alter its currently policy path.”
Alison Booth, ANU: “The fundamentals have not yet altered enough to warrant any change.”
Brian Parker, Sunsuper: “Enough downside risks to the economic outlook and to inflation to keep RBA on hold.”
Christine Williams, Smarter Property Investing: “Employment has reduced slightly. Housing pricing has slowed and or reduced slightly from an investor perspective. My opinion due to the impact of stamp duty payable for investor purchases.”
Clement Tisdell, UQ-School of Economics: “No major changes in the economy that would warrant a change. These days, this rate is more a signalling device than anything else.”
Dr Andrew Wilson, My Housing Market: “Drums are beating louder for a cut but RBA have somewhat painted themselves into a corner with recent consistent statements that next move likely to be up. Ordinary inflation data, unions marching in the streets demanding higher wages, stock market crumbling and housing markets tanking. If the next wages index remains benign then a louder cut chorus will be heard – clock ticking.”
Geordan Murray, HIA: “Inflationary pressures are still below the target band and there is still excess capacity in the labour market, so rates are likely to be left on hold. It will be interesting to see what the RBA make the latest update to the labour force figures which showed the national unemployment rate dropped to 5.0 per cent, with rates in NSW and Victoria are 4.4 and 4.5 per cent, respectively. Housing credit growth is continuing to slow and home prices in Sydney and Melbourne are easing, it will be interesting to see what the RBA makes of these developments in the context of their earlier concerns about the risks posed by these two markets.”
Janu Chan, St.George Bank: “Low inflation and slow wage growth continue to point to scope for the RBA to leave the cash rate on hold.”
John Caelli, ME: “The RBA are still looking for further falls in unemployment and higher inflation. Current settings are considered appropriate to support this.”
John Hewson, ANU: “Uncertain data – economy slowing.”
Jonathan Chancellor, Property Observer: “We are only starting to see serious shocks in the property market. And if it escalates the accompanying uncertainly will trigger a drag on the wider economy too. The RBA will be watching closely. Its prior modelling found increases in uncertainty can trigger a downturn characterised by lower employment growth, weaker retail sales growth, and a fall in consumer confidence.”
Jordan Eliseo, ABC Bullion: “When assessing the economy as a whole, its a mixed scorecard for the RBA. They will be pleased with recent developments in the labour market, though persistently low inflation, and continued falls in the housing market are obvious areas of concern. On balance, there is no immediate case to move rates in either direction, hence the likelihood that they’ll remain stuck at 1.5%.”
Leanne Pilkington, Laing+Simmons: “We can’t see any reason for a Cup Day surprise this year. The subdued housing market, particularly the major markets of Sydney and Melbourne, combined with a weak inflation rate beneath the target range should continue to keep rates low in the short to medium term.”
Malcolm Wood, Baillieu: “While the RBA is bullish on growth, the housing downturn and inflation below target will lead them to leave rates on hold.”
Marcel Thieliant, Capital Economics: “While the unemployment rate is now close to the RBA’s estimate of the natural unemployment, the RBA will want to see more evidence that wage growth is picking up. What’s more, the RBA will want to see how the housing downturn is affecting consumer spending, to what extent the Royal Commission is restraining credit growth, and whether the trade war is restraining export growth.”
Mark Brimble, Griffith Uni: “The economy remains delicately poised. With increasing fuel prices and lending rates, credit availability declining and asset prices easing, both sentiment and activity are vulnerable.”
Mark Crosby, Monash University: “The RBA has signalled it will be holding rates steady this year and into early 2019.”
Mathew Tiller, LJ Hooker: “There was no discernible change in domestic economic indicators over the past month, ensuring that the RBA will hold the cash rate steady in November. A number of global economic developments may yet have an impact on the outlook for the Australian economy. That’s said, there is little chance of a change in the official cash rate in the short term, especially given the ongoing soft inflation numbers and the slowdown in the housing market; due to higher interest rates and tighter lending restrictions by the banks.”
Matthew Peter, QIC: “Rising risks to the global economy, the domestic housing downturn and modest underlying inflation mean that the RBA is in no hurry to raise rates. However, a robust economy, strong employment growth and a falling unemployment rate mean that the RBA will not want to postpone normalising the cash rate indefinitely and will pull the trigger on a first rate hike in the second half of 2019.”
Michael Witts, ING Bank: “The economy is unfolding as the RBA has anticipated therefore no action required by the RBA.”
Nerida Conisbee, REA Group: “There has been some great economic news lately, particularly that unemployment has hit 5%. While this is the rate at which the RBA believes will kick start wages growth and inflation, this is yet to happen. As such, rates are likely to stay on hold this month.”
Nicholas Gruen, Lateral Economics: “They’ve telegraphed it for ages.”
Noel Whittaker, QUT: “No reason to raise or lower. $ is down, property prices are falling and the economy is OK.”
Peter Boehm, KVB Kunlun: “There are no economic or financial reasons to move rates at this stage.”
Peter Gilmore, Gateway Bank: “Although unemployment has fallen, consumer confidence will be shaken by the house price and stock market falls.”
Peter Haller, Heritage Bank Limited: “There is no economic case for changing the cash rate at this point in time.”
Saul Eslake, Corinna Economic Advisory: “Although most recently reported economic growth figures were ‘above trend’, and the unemployment rate is 5% – the level traditionally regarded as signifying ‘full employment’ – the above trend growth is unlikely to be sustained in the near-term, the unemployment figure was probably ‘rogue’, there is still a lot of spare capacity in the labour market by other measures, the RBA itself has started to ‘wonder out loud’ that unemployment probably needs to be lower for longer than history suggests before wages growth starts to pick up – and, most importantly of all, the latest CPI data show ‘underlying’ inflation still running below the RBA’s target range.”
Shane Oliver, AMP Capital: “The fall in the official unemployment rate to 5% helped by above trend economic growth is good news. But the slide in home prices in Sydney and Melbourne risks accelerating as banks tighten lending standards which in turn threatens consumer spending and wider economic growth and inflation and wages growth remain low. Against this backdrop, it remains appropriate for the RBA to leave rates on hold.”
Stephen Koukoulas, Market Economics: “RBA is continuing to ignore its inflation target otherwise it would be cutting.”
Tim Nelson, Griffith University: “RBA believes current state of monetary policy is acting to gradually reduce unemployment with inflation in check. ”
Other participants: Bill Evans, Westpac.
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