While Tuesday’s Reserve Bank of Australia board meeting was superficially a non-event, there are some important undercurrents swirling around the battling Aussie dollar, the rapidly ballooning local housing market, and diminishing overseas appetite for Australian assets.
For the avoidance of doubt, the central bank’s easing bias remains intact, although another cut is not imminent and remains data dependent. The RBA is pleased to see better global data and likely believes recent Chinese indicators put paid to the notion that the Middle Kingdom cannot deliver 7 to 8 per cent GDP growth.
A critical take-away from Tuesday’s meeting was that the central bank wants Australia’s exchange rate to do even more of its heavy lifting given a still sub-trend economy. Hence one RBA board member, John Edwards, claimed last week that the Aussie dollar was “still a bit too strong to help … in the transition we need to make”. On Tuesday Glenn Stevens chimed in with the assessment that the currency “remains at a high level”. Further falls “would help to foster a rebalancing of growth in the economy.”
The RBA understands that a condition precedent for any depreciation in the dollar is maintaining – given the market’s fickle ways – its “easing bias”. So it is not taking future cuts off the table.
Having said that, it is increasingly cognisant of the financial stability pickle it faces having cut the price of money to the cheapest levels in history. The NAB-owned UBank is now advertising a 4.48 per cent home loan rate, which compares to an average 7.6 per cent headline home loan cost since 1993.
Business and residential borrowing rates are below their GFC marks. Auction clearance rates in Sydney soared to 81.2 per cent last weekend, with house prices in Australia’s largest city up 7.5 per cent in the first eight months of the year.
The nation’s biggest mortgage broker, AFG, which has 10 per cent of the market, reported this week that it approved more home loans in August – $3.6 billion in total – than any month ever before.
Blind Freddy can see we are embarking on a housing boom. Where else are savers going to stash their money with the cash rate at 2.5 per cent and the most attractive term deposits offering a miserly 3.9 per cent?
Ironically for a central bank that has lambasted others for blowing house price bubbles, the longer Australian borrowing costs remain at these lows, the more likely families will start to think this is indeed a “new normal” that will persist indefinitely, as bond bandits would have us believe.
A final dynamic at play is a global cringe for Aussie assets that the RBA is probably not displeased to see (as it puts downward pressure on the currency).
Except, of course, if you are a Chinese oligarch looking to expatriate a bucket-load of cash to the relative stability of the sunburnt democracy. For the select few that fall into this camp, high-end Sydney property is a preferred destination. Just ask three recent vendors of homes for $52.5 million, $33.5 million, and $21 million to mysterious Chinese buyers.
Australia's economy is continuing to grow, albeit at a slow pace, just days out from the federal election.
But economists warn that the much-needed rebalancing of economic activity away from the mining sector towards non-mining parts of the economy remains ''just a forecast'', with few signs of life outside the housing sector.
The Reserve Bank of Australia kept the official interest rate at 2.5 per cent on Tuesday, the lowest since the 1950s, admitting that the economy had been growing ''a bit below trend'' for the past 12 months.
Economic activity was likely to remain subdued in the near-term, despite a 15 per cent fall in the value of Australia's dollar since early April.
''[But] it is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy,'' RBA governor Glenn Stevens said.
It came on the same day as the Bureau of Statistics released figures showing retail sales grew just 0.1 per cent in July, seasonally adjusted, after sales in our big department stores fell nearly 8 per cent.
This followed months of flat or negative sales growth, and meant annual growth in July was just 1.9 per cent - well below the inflation rate of 2.4 per cent. Economists said this showed the much-touted rebalancing of the economy was still a long way off.
''The retail numbers weren't particularly impressive, and in terms of the rebalancing of the economy that we've been expecting we're really only seeing it in the housing market, it hasn't broadened beyond housing,'' HSBC Australia chief economist Paul Bloxham said. ''We're still expecting it to come, but that broader rebalancing is still a forecast, rather than a reality.''
The continuing weakness in retail sales has added to the case that the RBA might have to cut rates again this year, National Australia Bank economist Spiros Papadopoulos said. ''Rising unemployment in an economy growing below 3 per cent will continue to weigh on consumers' minds and it will be some time before we see retail spending and consumption growing strongly again,'' Mr Papadopoulos said.
New data showed the current account deficit, which shows the extent to which we call on the savings of foreigners to fund the part of our nation's investment spending that we're unable to fund from our own saving, increased in the three months to June by $610 million, or 7 per cent, to $9.35 billion.
The Reserve Bank aviary appears to house neither monetary hawks or doves – just penguins sitting pat despite today’s weak retail sales, focusing instead on the present low interest rates doing their stuff in the housing market and the world holding steady.
Meanwhile, the pet shop galahs will find it hard to justify their call that the RBA still has an easing bias. Barring a further external shock and the uncertainty over the direction of fiscal policy, this is looking rather like the bottom of the interest rate cycle.
Today’s brief statement by governor Glenn Stevens concludes with: “The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.” No rate cut
The Reserve Bank has kept interest rates on hold, leaving the official rate at 2.5 per cent. Peter Martin explains why.
That’s the same final sentence used at the end of last month’s meeting, after the bank trimmed rates. It contrasts with the final sentence used in July and for several months previously: “The board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.”
The RBA remains willing and able to cut rates if the economy requires it, but there’s no hint that it has its finger on the trigger. Instead, there’s a promise that the falls in interest rates over recent months will add to the support of “interest-sensitive spending and asset values” from the easing of monetary policy since late 2011.
In other words, the housing industry is still on the way up.
“At its meeting today, the Board decided not to yank the interest rate lever this month.
The world economy is chugging along below trend but some reckon it could pick up speed next year. Commodity prices are sliding but are still high historically. Few signs of inflation around the world.
Globally the Price of Debt remains low though the yields on bonds have risen a bit as the market notes comments by the Fed that it might reduce its manipulation of the bond market at some point. Financial markets around the world have got twitchy in response to the possibility that the Price of Debt in the US might rise. At this stage, we are doing okay as the Australian Banks are still finding it easy to sell IOUs to foreigners to help maintain the low Price of Debt offered to Australian borrowers.
In Australia, the economy has been growing a bit slower than we would like. This is expected to continue as the mining boom winds down. Inflation is expected to remain within the range, even though the exchange rate is falling, as labour cost increases have slowed as more people lose their jobs and stop being greedy.
The manipulation of the Price of Debt domestically has encouraged consumption on credit and helped keep asset values inflated (houses prices). We expect the recent cuts to keep working for a while. Household’s are showing some signs of responding to our ‘bait rates’ but generally they seem to have sussed out our private bank Debt Product support strategy is not really in their interests.
The $AUS has fallen by around 15 per cent since early April but is still high. It may fall further overtime and though this may help some parts of the economy we are not planning on doing anything to encourage it.
The Board will continue to try to goose the economy with cheap debt providing inflation behaves.”
The nation’s biggest mortgage broker, AFG, which has 10 per cent of the market, reported this week that it approved more home loans in August – $3.6 billion in total – than any month ever before.
Blind Freddy can see we are embarking on a housing boom. Where else are savers going to stash their money with the cash rate at 2.5 per cent and the most attractive term deposits offering a miserly 3.9 per cent?
Ironically for a central bank that has lambasted others for blowing house price bubbles, the longer Australian borrowing costs remain at these lows, the more likely families will start to think this is indeed a “new normal” that will persist indefinitely, as bond bandits would have us believe.
Chris Joye's article is spot on.
I will believe Macroprudential in Australia when we see it (never).
The RBA have given no hint they are even thinking about MP and why would they – they have made it clear they want houses prices to rise.
Sydney generally leads the way up so I would not be surprised if the others follow.
People assume that debt of 150% of disposable income is the limit. It's not. The sky is the limit.
We may find that the RBA considers a rise beyond that point the lesser of two evils. Even more debt v asset price deflation.
It is remarkable how keen people are to try rationalise the RBA actions as not being incredibly short sighted.
Interest rates will sooner or later rise at some point but I believe that this is probably the new normal. I don't expect them to return to the "old normal" any time soon.
We only have to look at what happened the last time the RBA tried to return interest rates to what they felt was a neutral setting following Australia's successful avoidance of recession during the GFC - the housing market promptly nose dived.
Housing is too expensive now to maintain much higher rates of interest.
Good. Now push 'em up to about 15% 'n let's see how all these little bull baskets go! ...
Yeah and have roaring fires across the country followed by a tsunami Then bring on some cyclones and then zombie wombats and kangaroos But its OK, because Mad Max will save us because he fked the Borg Queen (resistance really was futile) and now has a thorium reactor in his Interceptor
Hey, relax fella. He was only talking about interest rates rising, and not even as far as they did in the last big upswing. But I doubt we will see that for many many years. My money is on a deflationary depression like back 80 years ago. You gotta admit, all the signs are there. The last 8 years of action in the Australian property market has been unheard of, except back in the roaring twenties. Back then debt was a real millstone for anyone who held it and property fell into a 30 year bear market. Wouldn't wish that on a broke dick dog.
The RBA might not object if the exchange rate is lower but they are more concerned to do whatever they can to avoid asset deflation and that means keeping the cost of Debt Products low. As a CAD nation our Debt Prices are affected by the exchange rate.
So they make observations about the exchange rate but are very careful to avoid any suggestion that they doing anything to influence it.
If the RBA wanted to they could easily buy up some foreign assets and push down the exchange rate. That would set the direction very quickly.
The moment foreign savers believe the RBA is ‘trying’ to push down the currency the cost of debt from foreigners will rise.
The trigger point for Australia’s housing bubble is likely to be rising Debt Prices as the exchange rate falls, which most agree it will eventually do as mining slows but if taper happens it could do so very quickly.
As mortgage rates in Australia get dragged up regardless of what the RBA does – the housing slide will continue – as time goes on and there has been little slow melting the risk is a faster melt.
Chances are this is why neither party is muttering a word on housing.
No one wants to remove the next straw from Kerplunk.
Despite the rate remaining unchanged yesterday, opinions abound across the property industry. Here are comments from leading property industry experts that emerged yesterday.
REIA president Peter Bushby
In recent years, lower borrowing costs have been a major driver of improving housing affordability and have helped many Australians with their mortgages.
As a result of the easing monetary policy, housing affordability in Australia has been improving slightly for the past two years and the proportion of income required to meet home loan repayments is at its lowest since the June quarter of 2003.
Housing affordability is a real issue for Australians and first home buyers need an incoming Government to address this through a comprehensive housing policy.
Keeping interest rates low is essential not only for encouraging first home buyers into the market but it’s vital to further stimulate building activity and provide new jobs in the housing industry.
ANZ Research head of Australian economics Ivan Colhoun
Today’s Monetary Policy Decision text by the RBA was almost identical to that released following the August easing of monetary policy.
By reverting to the somewhat standard “The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target”, the Bank is likely signalling no near-term move in rates is being considered (the absence of phrases such as “scope to ease” and “policy is appropriate for the time being” are also indicative of this less active easing consideration).
One of the main discussion points about today’s statement seems to be the absence of reference to scope for easing. We do not read this as suggesting there is no scope for further easing or that the Bank has shifted to a neutral bias. To us the Bank was signalling that it was on active easing watch prior to August’s move, but this active consideration expired after the August move. The phrase was not restated after the August move or in the August minutes. However, with growth set to remain below trend for the next year or so, inflation contained, and unemployment gradually rising, there remains scope for further monetary easing if required. The August minutes reinforce this assessment as the Bank remarked it did not want to encourage thoughts of imminent further easing, nor did it want to suggest that rates could not be reduced further. Its conclusion in the minutes was that the Board would study incoming data in the months ahead to see if policy remains appropriately calibrated. Further information on the Board’s thinking may well be forthcoming in the September Board Minutes, if the August Minutes are anything to go by.
The Bank again noted that the AUD remained at a high level and that it may fall further, something that would be helpful in facilitating the transition of growth from mining-investment led growth to broader growth in other sectors of the economy.
Today’s statement reduces the chance of a further cut in the cash rate as early as the October Board meeting. The November meeting is therefore the likely earliest time period for a further move (after the next CPI release). While we suspect the Bank would prefer not to reduce interest rates any further in this cycle as lending rates and real cash rates are now at stimulatory levels, there remain a number of pressures to the downside given growth is forecast to be below trend for an extended period and unemployment is rising. This continues to reinforce our view that any early rise in Australian cash rates remains very unlikely. The course of the AUD is also an important consideration in the setting of policy at the present time.
RP Data research director Tim Lawless
The hold on interest rates today comes as no surprise despite the low private sector inflation reading that was released yesterday. The latest data associated with the housing market remains positive, providing an increasingly firm indication that households and developers are responding to the low interest rate environment. Dwelling values have continued along their recovery path, with home values half a percent higher over in August and 7% higher since the housing market started recovering in May last year. The 0.5% rise in dwelling values in August is likely to provide the RBA with some comfort after values rose by a cumulative 3.5% over June and July. Importantly the rise in dwelling values has been accompanied by a substantial rise in buyer numbers as well. Based on transaction data for the June quarter, the number of home sales across the capital cities is about 31 percent higher than a year ago. Data on dwelling approvals yesterday also painted a stronger view of the housing market, with approvals 28% higher over the year. All housing market indicators are pointing to an ongoing recovery and a strong spring selling season. Mortgage rates remaining low together with buyer activity substantially higher and listings numbers about 15% lower than a year ago we are seeing the typical capital city home selling in just 41 days compared with 62 days a year ago and clearance rates remaining above the 70% mark week on week.
Finder.com.au spokesperson Michelle Hutchison
Borrowers and prospective first home buyers don't have to rely on the Reserve Bank for a rate cut this mortgage season because several lenders have started the season with special offers. In fact, eight lenders - including major banks - are offering special deals such as waived fees or discounted rates. It's a great idea to compare deals, use comparison sites like finder.com.au and take advantage of the offers available. But make sure you do your research because a discounted rate or waived fee might not be worth paying more over the long term.
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