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:
Although the RBA has in now kept the official cash rate on hold at 1.5% for 26 months, the drivers of this monthly decision have varied more recently.
Notably Australia’s economic growth data for the 2nd Quarter was released earlier in September and positively surprised with growth at 3.4%, the fastest since 2012.
The production growth measure was much stronger and the household consumption growth was a solid 3% over the year after some upward revisions.
It remains Macquarie’s view that the RBA is unlikely to alter its interest rate policy settings until 2020.
Comments from Tim Lawless:
Amidst falling housing prices, low inflation and rising mortgage rates, the decision from the RBA to keep the cash rate on hold was widely expected; in fact financial markets aren’t expecting any move in the cash rate throughout 2019 and into 2020.
Despite the housing downturn gathering some pace in September, with CoreLogic’s national index recording the largest fall in dwelling values over any three month period since late 2011, we don’t expect the RBA to throw a lifeline to the housing market in the form of lower interest rates.
Considering dwelling values comprise around 55% of household wealth and about 70% of household debt, the RBA has a keen interest in the housing markets performance.
Cutting the cash rate would likely provide further support to economic conditions, but could also risk refuelling growth in housing prices, as was the case in 2016 when the cash rate was cut by 50 basis points between May and August.
Despite the recent subtle rise in mortgage rates, indebted home owners continue to benefit from the lowest mortgage rates since the 1960’s.
Although we expect housing values to drift lower, such low mortgage rates, together with population growth and relatively strong economic conditions should help to keep a floor under housing prices.
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, although they are gradually becoming less so in some countries.
Yields on government bonds have moved a little higher, but credit spreads generally remain low.
There has been a broad-based appreciation of the US dollar this year.
In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined since the end of June.
In response, some lenders have increased their standard variable mortgage rates by small amounts, while at the same time reducing mortgage rates for some new loans.
The latest national accounts confirmed that the Australian economy grew strongly over the past year, with GDP increasing by 3.4 per cent.
The Bank’s central forecast remains for growth to average a bit above 3 per cent in 2018 and 2019.
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 and debt levels are high.
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 due to rises in some commodity prices.
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, but it has depreciated against the US dollar along with most other currencies.
The outlook for the labour market remains positive.
The unemployment rate is trending lower and, at 5.3 per cent, is the lowest in almost six years.
The vacancy rate is high and there are reports of skills shortages in some areas.
A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent.
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 likely to be a gradual process.
Inflation is around 2 per cent.
The central forecast is for inflation to be higher in 2019 and 2020 than it is currently.
In the interim, once-off declines in some administered prices in the September quarter are expected to result in inflation in 2018 being a little lower than otherwise.
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 remains robust, but 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:
In this month’s finder.com.au RBA cash rate survey, experts and economists were asked how much they expect prices to dip by 2021, following last month’s prediction of a 20-month housing downturn in Sydney and Melbourne.
Here’s what our experts and economists had to say:
Jordan Eliseo, ABC Bullion: “The RBA will be encouraged by recent economic data, including better than expected employment and growth figures. Having said that, low wage growth and underemployment are still factors, whilst the negative wealth effect from falling house prices has months, if not years to play out. This, coupled with the likely slow down in employment growth in the months ahead will keep the RBA on hold for months to come.”
Shane Oliver, AMP Capital: “While economic growth ran above trend over the year to the June quarter and growth should be supported by business investment, infrastructure spending and exports going forward uncertainty remains around the outlook for consumer spending, house prices are likely to fall further and wages growth and inflation remain low.”
Alison Booth, ANU: “Fundamentals haven’t altered enough to warrant change.”
John Hewson, ANU: “Can’t risk moving in current and prospective environment.”
Malcolm Wood, Baillieu Holst: “Given heightened economic and political uncertainty, and inflation below the target band, steady policy is the most appropriate.”
Richard Robinson, BIS Oxford Economics: “Inflation and wages low. No inflationary pressures.”
Paul Dales, Capital Economics: “The unemployment rate is still too high and inflation is still too low to warrant higher interest rates. What’s more, the Royal Commission, the possibility of Labor government and the US-China trade war are extra reasons not to rock the boat.”
Saul Eslake, Corinna Economic Advisory: “RBA has made it increasingly clear that it is in no hurry to start raising rates. Although economic growth is now running ‘above trend’, unemployment and underemployment are still higher than the RBA wants, and inflation is lower than the RBA wants – and it expects progress on both of these fronts to be only ‘gradual’. The RBA seems unconcerned by recent ‘out of cycle’ movements in some lenders’ mortgage rates.”
Tim Moore, CUA: “Unless we see a strong trend in unemployment dropping toward the magic 5% level, we can expect to continue seeing low inflation levels and low wage growth, which will keep the RBA on the sidelines. Whilst the RBA has clearly communicated the next move is likely to be up, they have also given the caveat that they do not see this occurring anytime soon. Whilst the economy is continuing to show strength, there are still a few weaknesses and we are way off any concerns of the economy overheating.”
Peter Gilmore, Gateway Bank: “Whilst the unemployment rate has fallen, inflation remains subdued, and mortgage stress is on the rise, so the RBA will hold.”
Mark Brimble, Griffith Uni: “With higher fuel prices and out of round rate rises the RBA may consider reducing the cash to equalize the impact, but is unlikely to do so this month.”
Geordan Murray, HIA: “There is minimal of evidence of inflationary pressures. The RBA and ARPA seem content with the impact of their interventions with respect to cooling growth in housing credit, particularly among higher risk borrowers. Low interest rates are no longer a significant cause of property market concerns. Households have been propping up growth in consumption by reducing the rate savings. The rate of household savings is now down to only 1%. In the absence of wage growth, declining home prices are likely to result in more cautious household spending (i.e. slower growth in household consumption). In this environment it is unlikely that discretionary household spending contributes too much to inflation. The cash rate is likely to remain low to facilitate further improvement in non-mining business investment.”
Alex Joiner, IFM Investors: “Despite the economy expanding at an above trend rate the RBA continues to wait for inflationary pressure to build that are underpinned by an acceleration of wages growth. It will need to see at least some evidence of these factors emerging in the data before it can confidently signal that a rate rise should be expected in the near term.”
Michael Witts, ING Bank: “[We will see a] continuation of the trend of recent months.”
Peter Boehm, KVB Kunlun: “Whilst the RBA’s cash rate is likely to go up sometime in the future, there are no compelling reasons for this to occur in the near future. This is because the present level of economic growth does not indicate a need to slow things down. In fact, raising rates now could have negative consequences for the economy by for instance, putting further pressure on highly geared mortgage borrowers and the housing market generally through even higher loan rates.”
Leanne Pilkington, Laing + Simmons: “Most of the majors and a raft of smaller lenders have already taken matters into their own hands and adjusted their rates despite the RBA’s hold position. Consumers are right to be sceptical about the attempts to justify these adjustments, especially against the backdrop of easing house prices. But there’s no justification for the RBA to exacerbate the situation.”
Mathew Tiller, LJ Hooker: “No significant surprises in domestic economic indicators over the past month, will see the RBA hold steady during the October board meeting. The RBA will be keeping a keen eye on a number of global economic developments to determine their 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 banks have done the heavy lifting by increasing interest independently of the RBA.”
John Caelli, ME: “There is no compelling case to put up rates yet. Excess capacity remains in the labour market, and concerns remain around inflation and household debt levels. Furthermore, the latest RBA minutes clearly indicate the next move will be up.”
Mark Crosby, Monash University: “RBA will continue to wait until next year at this point.”
Jacqueline Dearle, Mortgage Choice: “I expect the RBA to hold the official cash rate at 1.5% in October due to a combination of factors close to home, such as low inflation, an acceptable unemployment rate and stagnant wage growth. On an international level, Trump’s trade tariffs on Chinese imports may create a drag on global growth, which may impact on the Australian economy and jobs. Additionally, further upward pressure on the cost of wholesale borrowing for our own financial institutions is expected, as U.S. Federal Reserve Chairman Jerome Powell has told Congress he wants to increase America’s interest rates. This may result in further out-of-cycle rate rises which will have a ripple effect across our economy and impact Australian property owners. Combined with tightened lending standards and a softening housing market, this will also help anchor the rate for now.”
Dr Andrew Wilson, My Housing Market: “Although recent data remains positive overall with lower jobless rate, declining budget deficit and a steadying dollar, concerns are increasing regarding rising trade barriers imposed particularly by US and China. Increased fuel costs will also be concerning the RBA with wages yet to rise as expected. Rates will remain on hold and the case for a near-term cut – although clearly an outside chance – is strengthening.”
Jonathan Chancellor, Property Observer: “The central bank don’t have it going all their way, but there’s no way they see any trigger in what’s happening and not happening across Australia. Falling house prices is fine, though the board has noted they are becoming more widespread especially across Sydney and Melbourne.”
Matthew Peter, QIC: “The RBA will be on remain on hold. However, with the Australian economy firming and the labour market tightening, the RBA will be in a position to begin rate hikes sometime in the second quarter of 2019.”
Noel Whittaker, QUT: “No reason to move either way.”
Nerida Conisbee, REA Group: “While there have been some recent positive signs in the economy, it still isn’t strong enough to start increasing rates.”
Christine Williams, Smarter Property Investing P/L: “Whilst the Royal Commission is still in progress I don’t think the Reserve Bank will move.”
Brian Parker, Sunsuper: “Still plenty of spare labour market capacity, and not enough evidence that wage and price pressures are strong enough to force a hike.”
Clement Tisdell, UQ-School of Economics: “Economy is not overheated and the RBA would like to do what little it can to restrain increases in the rate of interest charged by the private sector given the level of debt.”
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