Yahoo Finance Reserve Bank of Australia makes September rate decision as property booms
The Reserve Bank of Australia has kept the official interest rate at its current record low of 1.0 per cent as the property market surges back to life, posting its first positive monthly growth in nearly two years.
The decision will surprise few, with 95 per cent of property experts and economists surveyed by Finder predicting the official cash rate would stay on hold, and many citing a need for more information before cutting again.
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New figures released by property analytics firm CoreLogic revealed the Australian property market made its first positive growth in 22 months in August, surging 0.8 per cent, with pundits now saying the question is whether that increase will be enough to stimulate the broader economy.
“The resurgence in Sydney and Melbourne housing values was likely a key topic of conversation amongst the RBA Board at today’s meeting. In line with rate cuts in June and July, housing values in Australia’s two largest cities have recorded a lift, with dwelling values rising 1.9 per cent and 1.8 per cent in Sydney and Melbourne over the past three months,” CoreLogic research director Tim Lawless said today.
“Clearly housing market conditions are responding to lower interest rates as well as the recent loosening of loan serviceability rules from APRA and the positive influence of the stable federal election outcome.
“The recent step up in the pace of value growth is likely to raise some concern that the lowest mortgage rates since the 1950’s is fuelling renewed housing market exuberance at a time when household debt remains around record highs,” he added.
And if interest rates do eventually increase, Australians will need to divert more money towards paying off their debt, minimising spending, and that’s something the Reserve Bank of Australia (RBA) will be aware of, Lawless continued.
The RBA wants to wait and see, experts say
“Further cuts at this point in time are unlikely given the recent pick-up in the housing market, and the labour market holding steady,” Bankwest’s Rebecca Cassells said.
“Moving the cash rate any lower will elevate market uncertainty, countering any potential benefits to stimulate investment and consumption responses.”
Mortgage Choice’s Susan Mitchell added that the RBA will wait and see how its last two rate cuts in June and July will play out before moving again.
“The latest data from the ABS revealed a stable unemployment rate and flat annual wage growth. There are encouraging indicators from the property market that a gradual recovery may be on the horizon,” she said.
“Auction clearance rates indicate that buyer demand is growing and the latest dwelling value data points to a clearer stabilisation of the property market. The RBA will continue to monitor developments in the domestic economy, as well as the global economy, which is currently under threat by US-China trade tensions before providing further monetary policy easing.”
When will the Reserve Bank of Australia cut rates again?
Most experts agree the RBA will move rates downwards before they begin raising them again, although there is some disagreement around when this will occur.
The majority predict Australia will see another rate cut before Christmas, with AMP Capital chief economist Shane Oliver and independent economist Stephen Koukoulas both predicting a rate cut in November.
“We had pencilled in two 0.25 per cent cuts around November and February,” Oliver told Yahoo Finance.
“While it’s possible that the RBA will go below 0.5 per cent for the cash rate it’s unlikely as there will be little point as the banks will struggle to pass it on to borrowers as they won’t cut their deposit rates into negative territory,” he added.
Koukoulas agreed, arguing that the bank would move to cut rates in November.
“We already have housing at a turn and exports, business investment and infrastructure are already strong.
“The missing link is consumer spending but that is likely to get a boost from lower rates ands the housing upturn, and I note that retailers, according to the Illion business survey, are all of a sudden upbeat.”
CommSec chief economist Craig James also pinned November as the date when the RBA will next cut.
Statement by Philip Lowe, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.
The outlook for the global economy remains reasonable, although the risks are tilted to the downside. The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans due to the increased 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 further steps to support the economy, while continuing to address risks in the financial system.
Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined and are at 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 its lowest level of recent times.
Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices and turnover. Looking forward, growth in Australia is expected to strengthen gradually to be around trend over the next couple of years. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.
Employment has grown strongly over recent years and labour force participation is at a record high. The unemployment rate has, however, remained steady at 5.2 per cent over recent months. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation pressures remain subdued and this is likely to be the case for some time yet. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.
There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity has weakened. Growth in housing credit remains low. Demand for credit by investors continues to be 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.
It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.
The Yahoo Finance’s All Markets Summit will take place on the 26th September 2019 at the Shangri-La Hotel, Sydney. Check out the full line-up of speakers and agenda here.
