This article is from the Australian Property Journal archive
THE Reserve Bank of Australia has kept interest rates at 1.50%, unchanged for the 29th meeting, however the RBA has hinted that the next move would be a cut and economists believe that could be as early as August.
Capital Economics’ economists Marcel Thieliant and Ben Udy said the RBA sounded more cautious when it left interest rates unchanged at 1.50%.
“With the full impact of the housing downturn on economic activity yet to be felt, we think the Bank will start to cut interest rates soon, perhaps as early as August.
“The statement noted that global financial conditions had eased recently. But that didn’t prevent the board from reiterating that downside risks to the global economy had increased. In fact, the Bank sounded more alarmed by noting that growth in trade had declined and that investment intentions have softened.
“The RBA still sounded optimistic when it came to the labour market, which it described as strong and which it expects to improve further. That’s not surprising given that the unemployment rate fell to an eight year low of 4.9% in February. However, the statement no longer mentioned that it expects the rate to fall to 4.75% by the end of next year, which may be a sign that the Board is about to turn less upbeat,”
Thieliant and Udy said another indication that the RBA is getting more worried is that it noted that the adjustment “in established housing markets” continued.
“Previously, it only highlighted the softening in housing market conditions in Sydney and Melbourne. Indeed, prices have now started to fall in Brisbane and Adelaide, too.
“There are mounting signs that Australian consumers are curbing spending amid falling housing wealth and sluggish income growth. And while building approvals jumped by 19.1% m/m in February, we think that the fall in dwellings investment has much further to run. Finally, the recent slump in business confidence suggests that business investment growth will remain muted.
“What’s more, employment growth is a lagging indicator of economic activity and we think that the unemployment rate will soon start to rise again. That will keep a lid on wage growth and suggests that underlying inflation will remain below the lower end of the RBA’s target band for the foreseeable future,” they added.
“All told, our view remains that the RBA will start to cut interest rates to 0.75% by the middle of next year, with the first cut happening as soon as August. That view is more dovish than the analyst consensus, which foresees unchanged rates,” Thielant and Udy said.
AMP Capital chief economist Shane Oliver said the RBA is underestimating the impact of the housing downturn on the economy.
“Of course it would be dangerous to read too much into this but maybe the RBA’s neutral bias on rates is getting a bit less neutral in the direction of easing.
“Our view remains that the RBA is underestimating the impact of the housing downturn on the economy – particularly in terms of its impact on consumer spending – and as a consequence we still see weaker growth and lower inflation than the RBA is forecasting. As a result our view remains that the RBA will cut the cash rate to 1% by year end,” Oliver said.
Australian Property Journal
