In a widely expected decision, the Reserve Bank of Australia (RBA) has decided to keep the official interest rate at its record low of 0.75 per cent, after pulling the trigger for the third time this year in October.
The bank has cut rates three times since June, causing house prices to rise in Sydney and Melbourne at the fastest growth rate we’ve seen in 10 years.
At the same time the rate cuts seem to have made a little dent with unemployment improving slightly and subtle signs of growth in our economy.
“The latest domestic economic data has provided the Bank with some breathing room” said Susan Mitchell, Chief Executive Officer of Mortgage Choice.
“Encouraging data from the labour market played a part in delaying the need for another rate cut.
Data from the Australian Bureau of Statistics (ABS) revealed that the unemployment rate fell to 5.2% in September.
And, while this would have been welcome news to policy makers, it is still far off the RBA’s unemployment target of 4.5%, which suggests that another rate cut may be on the cards in the coming months.
“In other positive news for policy makers, inflation grew over the September quarter, rising 0.5% from the June 2019 quarter. On the other hand, the annual rate of inflation rose 1.7% over the twelve months to September 2019, which is below the RBA’s target range.”
It’s unlikely the RBA will cut rates again this year. They are likely to wait and see how the effects of their recent rate cuts pan out.
Here’s what the experts have to say:
Martin Lakos ( Macquarie) comment:
Despite much publicity surrounding the cut in Australia’s 2019 economic growth to 1.7% by the International Monetary Fund, the RBA decided to keep the official cash rate on hold at 0.75% at its latest meeting.
In the mix of considerations for this rate decision, the RBA board would have taken into account these external factors, the weak domestic growth forecasts, September quarter underlying inflation of 1.4% as expected, the rebound in house prices, the stabilising employment data and the fact that they have been responding, by cutting rates three times this year.
Macquarie thinks it’s unlikely the RBA will cut rates again this year and are likely to be patient to see any response in the economy to cash rates at 0.75%.
Comments from Tim Lawless (Corelogic):
Considering the RBA is running out of conventional monetary policy ammunition, the decision to hold the cash rate at the historic low of 0.75% was widely anticipated.
The decision to keep rates on hold was supported by the latest labour market and inflation readings, which saw the national unemployment rate nudge lower, while annual headline inflation edged slightly higher.
Additionally, a rebound in housing values and a rise in buyer activity will hopefully begin to flow through to a gradual improvement in household wealth and spending.
While several of the key economic indicators have stabilised, no doubt the RBA will be carefully monitoring other indicators which have continued to lose momentum such as consumer confidence, residential construction activity and retail spending.
One of the negative side-effects of such historically low interest rates is that Australian households and businesses are reading through the low rate setting and becoming less confident about their household finances and the outlook for the economy, which is offsetting some of the stimulatory benefits of historically low interest rates.
Although the cash rate has remained on hold, lenders are becoming increasingly competitive, particularly for high quality borrowers – ie those with low debt relative to their incomes and a responsible track record of savings together with expenses that are in line with their incomes.
No doubt the lowest mortgage rates since at least the 1950’s and improved access to credit following APRA’s decision to adjust the interest rate serviceability floor are contributing to a rebound in housing market conditions.
While the improved housing market conditions are a positive for broader economic conditions, an increase in speculative activity from property investors or a slip in the quality of lending standards could be the trigger for a new round of macro-prudential policies aimed at maintaining prudent lending standards and keeping a lid on further accrual of housing related debt.
Comments from the RBA:
At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.
While the outlook for the global economy remains reasonable, the risks are tilted to the downside.
The US–China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty.
At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low.
In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.
Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks and subdued inflation.
Expectations of further monetary easing have generally been scaled back over the past month and financial market sentiment has improved a little.
Even so, long-term government bond yields are around record lows in many countries, including Australia.
Borrowing rates for both businesses and households are also at historically low levels.
The Australian dollar is at the lower end of its range over recent times.
The outlook for the Australian economy is little changed from three months ago.
After a soft patch in the second half of last year, a gentle turning point appears to have been reached.
The central scenario is for the Australian economy to grow by around 2¼ per cent this year and then for growth gradually to pick up to around 3 per cent in 2021.
The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth.
The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.
Employment has continued to grow strongly and has been matched by strong growth in labour supply, with labour force participation at a record high.
The unemployment rate has remained steady at around 5¼ per cent over recent months.
It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021.
Wages growth remains subdued and is expected to remain at around its current rate for some time yet.
A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
The recent inflation data were broadly as expected, with headline inflation at 1.7 per cent over the year to the September quarter.
The central scenario remains for inflation to pick up, but to do so only gradually.
In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.
There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne.
In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight.
Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range.
Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.
The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.
Comments from the Finder.com.au RBA Survey:
Recession fears: Experts vs consumers
Experts and economists continue to say that a recession is unlikely or very unlikely (69%, 22/32), with 22% (7/32) being non-committal (neither likely nor unlikely) and just 9% (3/32) think a recession is likely.
Consumers however, are much more fearful.
The Finder Consumer Sentiment Tracker™ established in May 2019, surveys more than 1,000 Australians each month and thus far has found that of the 6,078 surveyed, 50% expect a recession in the next 12 months.
Experts and economists have noted this worry and as a result, more than half of them (56%, 17/27) think households are holding back on spending in fear of recession.
Cooke said there is recession talk at large, both domestically and internationally.
“While slow wage growth and underemployment seem like cause for concern for consumers, Australian economists can see the light at the end of the tunnel.
“Market behaviour is hugely driven by psychology and we need to be careful not to talk ourselves into a recession,” Cooke said.
Results from Finder’s Economic Sentiment Tracker, which gauges five key indicators – housing affordability, employment, wage growth, cost of living and household debt – continue to remain low.
“Finder’s Economic Sentiment Tracker has been bouncing around a bit of late, with the average positivity across all 5 metrics trending down over the last 12 months.
“The average percentage of economists who felt positive across 5 economic metrics covering employment, wage growth, housing affordability, cost of living and household debt has fallen from 30% in December 2018 to only 14% this month.
“I’ve never before seen all five of these metrics in the teens,” Cooke said.
Introduced in March 2018, this month’s tracker set an all-time low for economic sentiment in housing affordability (17%).
1Note: The RBA doesn’t meet in January
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