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Rates on hold on Melbourne Cup day
Rates have been kept on hold ahead of Tuesday’s Melbourne Cup race at 3pm, in line with punters expectations the RBA wouldn’t hike interest rates this side of Christmas.
The Reserve Bank of Australia (RBA) announced it would hold rates steady at historic lows of 1.50 per cent after its board meeting on Tuesday.
The decision was in line with most economists bets thats the RBA’s ‘slow and steady wins the race’ mentality would win the day.
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November’s decision marks the 15th month in a row Australia’s central bank has sat on the official cash rate, as it mulls over recent economic data indicating a mixed trajectory for the nation’s future growth prospects.
“A slowdown in housing market conditions has helped to alleviate some of the pressure to raise the cash rate,” said CoreLogic’s head of research Tim Lawless.
“Tougher lending conditions have arguably had a similar effect as a lift in the cash rate, except the effect is more focussed on slowing investment activity across the housing sector while low interest rates continue to provide a much needed economic stimulus.”
Low inflation should help to offset some stress across the household sector, however rising housing prices have forced many home owners to dedicate more of their income to paying off their mortgage – despite the ultra low rate environment.
New figures show Sydney mortgage holders, in particular, are borrowed to the hilt – dedicating almost 50% on average of their annual (gross) income to servicing a mortgage. Nationally households are settings aside less – 37% on average.
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Read the RBA Governor’s Philip Lowe’s statement in full:
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
Conditions in the global economy are continuing to improve. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Australia’s terms of trade are expected to decline in the period ahead but remain at relatively high levels.
Wage growth remains low in most countries, as does core inflation. Headline inflation rates are generally lower than at the start of the year, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve has started the process of balance sheet normalisation and expects to increase interest rates further. In a number of other major advanced economies, monetary policy has become a bit less accommodative. Equity markets have been strong, credit spreads have narrowed and volatility in financial markets remains low.
The Bank’s forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.
The labour market has continued to strengthen. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. The unemployment rate is expected to decline gradually from its current level of 5½ per cent. Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.
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Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing. CPI inflation is being boosted by higher prices for tobacco and electricity. The Bank’s central forecast remains for inflation to pick up gradually as the economy strengthens.
The Australian dollar has appreciated since mid year, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.
Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Housing market conditions have eased further in Sydney. In most cities, housing prices have shown little change over recent months, although they are still increasing in Melbourne. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.
The low level of interest rates is continuing to support the Australian economy. 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.
