Cash rate on hold as RBA keeps powder dry
In a move widely predicted by most industry experts, the Reserve Bank of Australia has opted to maintain the official cash rate at a record low for August.
Mixed economic conditions were the main driver of the decision following the board’s monthly meeting, with a softening housing market, low inflation and tighter lending standards identified among the key factors leading to the continued status quo.
“Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low,” explained RBA Governor Philip Lowe in his statement.
“Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.”
The RBA’s decision comes after recent data from CoreLogic revealed national house prices to have fallen at their fastest pace since 2012 to finish 1.9 per cent below their September 2017 peak.
“While the cash rate has remained stable, mortgage rates have been tweaked, the extent to which depends on the borrower type and loan product,” said CoreLogic’s head of research, Tim Lawless. “Clearly, the stability in the cash rate hides a deepening complexity in mortgage products brought about by the heightened level of regulation and focus from both lenders and policymakers on improving credit quality.”
AMP Capital chief economist Shane Oliver says the decision to extend the longest-ever period without a change to the official cash rate has occurred despite a measure of positivity by the RBA.
“Growth has picked up a bit and the RBA is optimistic,” he explains. “But inflation and wages remain too low, property prices are falling in Sydney and Melbourne, the housing construction cycle has peaked and uncertainty remains around the outlook for consumer spending. So, it’s way too early to hike, but it’s hard to mount a case for a cut either right now. So, best to remain on hold.”
International and local factors
In explaining its decision, the RBA also pointed to slightly slowing growth in China and low global inflation, despite the fact it has increased in some economies. When it came to uncertainty around global outlook, the direction of international trade policy in the U.S. was seen as a contributing factor. The RBA also noted a broad-based appreciation of the US dollar over recent months. Closer to home, Australian money-market interest rates are higher than they were at the start of the year, although they have declined since the end of June.
“These higher money-market rates have not fed through into higher interest rates on retail deposits,” continued Lowe.
Significantly, the RBA said the outlook for the labour market remains positive, with high vacancy rates and other forward-looking indicators continuing to point to solid employment growth.
“Employment growth continues to be faster than growth in the working-age population,” said Lowe. “A further gradual decline in the unemployment rate is expected over the next couple of years to around five per cent. Wages growth remains low. This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas.”
Moreover, Lowe added that business conditions are positive and non-mining business investment is continuing to increase. Support for the economy is also present in the form of higher levels of public infrastructure investment.
In terms of future rates outlook, Paul Dales from Capital Economics is among a range of experts tipping a prolonged period of cash rate stagnation, with credit policy and lender pricing changes being the main instigators.
“The RBA is increasingly worried that financial conditions will be tightened by banks raising their mortgage rates and using stricter credit criteria, so it will keep [the cash rate] at 1.5 per cent so as not to make things worse,” he said.