The Reserve Bank of Australia (RBA) announced its second interest rate decision for the year today.
Unsurprisingly, the cash rate remains on hold at a record low 1.5 per cent for yet another month – where is has remained since August 2016.
However, the reserve bank’s optimism about the economy is looking uncertain after the latest round of economic data.
Analysts say downside risks are building after company profits data came in weaker than anticipated, AAP reports.
Economists will release their final GDP forecasts after Tuesday’s Balance of Payments data, and if GDP growth is shown on Wednesday to have slowed too much, the RBA may soon have to deliver a cash rate cut many economists expect before the end of 2019.
“We have not changed our view that the RBA will need to cut interest rates this year,” AMP senior economist Diana Mousina said.
“We expect that GDP growth will continue to disappoint the RBA’s expectations and average around 2.5 per cent in 2019.”
Corelogic head of research Tim Lawless agrees that although the cash rate remains unchanged since August 2016, there is a growing possibility that rates could fall later this year.
“The strong labour market report for January was likely a key factor in keeping rates on hold, however in balance, wages have grown at a consistently low rate growth and inflation remains stubbornly below the target range,” he told Yahoo Finance.
“The sharp slowdown in residential construction activity and relatively benign retail trade figures may be hinting that weak housing market conditions are already spilling over to the broader economy.”
He added that no doubt the RBA are tracking housing market conditions very closely, watching for any further deterioration that might signal a dent to consumer spirits, resulting in less spending, more saving and a further pull back in residential construction activity.
In fact, CoreLogic recently reported another broad based decline in dwelling values in February, down 0.7 per cent nationally, however the good news was that the rate of decline has eased over the past two months and housing affordability is showing a consistent improvement across most housing markets.
“The performance of the housing sector over coming months should provide some clues about future monetary policy decisions,” Lawless said.
“A further deterioration in the pace or geographic scope of declines could tip the balance in favour of a rate cut later this year as the RBA becomes wary of the wealth effect moving into reverse.”
Glenn Stevens, Governor: Monetary Policy Decision
“At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.”
“The global economy grew above trend in 2018, although it slowed in the second half of the year. The slower pace of growth has continued into 2019. The outlook for the global economy remains reasonable, although downside risks have increased. The trade tensions remain a source of uncertainty. In China, the authorities have taken further steps to ease financing conditions, partly in response to slower growth in the economy. Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies. In most advanced economies, unemployment rates are low and wages growth has picked up.
“Overall, global financial conditions remain accommodative. They have eased recently after tightening around the turn of year. Long-term bond yields have declined, consistent with the subdued outlook for inflation and lower expectations for future policy rates in a number of advanced economies. Also, equity markets have risen, supported by growth in corporate earnings. In Australia, short-term bank funding costs have moderated, although they remain a little higher than a few years ago. The Australian dollar has remained within the narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.
“The Australian labour market remains strong. There has been a significant increase in employment and the unemployment rate is at 5 per cent. A further decline in the unemployment rate to 4¾ per cent is expected over the next couple of years. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process.
“Other indicators suggest growth in the Australian economy slowed over the second half of 2018. The central scenario is still for the Australian economy to grow by around 3 per cent this year. The growth outlook is being supported by rising business investment, higher levels of spending on public infrastructure and increased employment. The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities. A pick-up in growth in household income is nonetheless expected to support household spending over the next year.
“The adjustment in the Sydney and Melbourne housing markets is continuing, after the earlier large run-up in prices. Conditions remain soft in both markets and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased further. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
“Inflation remains low and stable. Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices.
“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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