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RBA leaves interest rates on hold at 1.5pc

Interest rates to hold at record lows. Source: AAP
Interest rates to hold at record lows. Source: AAP

Interest rates have remained on hold at a record low for the 27th consecutive month, as weak household spending remains a source of uncertainty for the economy.

A roll call of leading economists are unsurprised, with most believing the cash rate will hold steady at a record low 1.5% for a while longer.

Capital Economics and Westpac don’t expect a rate rise until late-2020, while the other three big banks are expecting a rise next year, while a recent Bloomberg survey of economists’ forecasts found just one in 10 thought the rate would be the same by the end of 2019.

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Corelogic head of research Tim Lawless said that although the cash rate remained on hold, 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.”

He added that 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,” Lawless said.

“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.”

Eight years since an increase research director, Sally Tindall, also said that it’s incredible to think there is a now a generation of first home buyers who’ve never experienced an RBA rate hike.

“Eight years is a long time between increases. Interestingly, the average home owner is paying less per month on their mortgage repayments now – but only marginally,” she said.

“The RBA is unlikely to hike rates in the near future, but that doesn’t mean people should become complacent about paying down their debt.

“Keep an eye on your rate and shop around to see what other lenders are offering. The banks are desperate for new business, particularly as their profit margins are squeezed which is a win for borrowers.”

Also read: 4 property investing tips for a volatile market

Statement by Phillip Lowe, Governor: Monetary Policy Decision for November

“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.”

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