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RBA Cash Rate Decision

Author: Eliza Owen
Source: Onthehouse.com.au

The Reserve Bank of Australia announced it will hold the official cash rate in December at 1.50%. The decision comes amid the election of Donald Trump in the US, NAB and Westpac increasing investor related mortgage rates and anticipation of low GDP growth figures.

Before Donald Trump became the president elect, there remained some conjecture that Australian interest rates were not at the trough of the cycle. But, as Trump's election platform hinted at inflationary policies around tax cuts and infrastructure, markets have signalled expectations of growth and inflation. This gives the US Federal Reserve room to increase interest rates without dampening inflation: it is a case of potential fiscal policy taking the burden off monetary policy.

What does this mean for Australia? An increase in Fed rates is a signal of increased global economic strength. It puts downward pressure on the Australian dollar. A lower AUD and stronger global economic growth should boost exports, and takes pressure off the RBA to lower the cash rate.

It is important to remember however, that before Trump became the president elect, further cuts by the RBA to 1.25% in 2017 seemed plausible. This was due to record low wage growth of 1.9% in the year to September, low underlying inflation of 0.35% in the month of September, and slowed growth in residential dwelling construction and approvals.

Australian labour markets have continued to deteriorate as jobs are lost in mining and manufacturing, and the construction sector slows. In the year to October, Australia has lost approximately 50,000 full time jobs, and Trump’s election has not changed those shaky fundamentals. In its last rate decision until February next year, the RBA has held rates steady among uncertainty of how global performance may shape the domestic situation.

Monday saw Westpac announce an increase on interest-only home loans, while NAB announced a 15 basis point increase to investor home loans. The initiative of banks to increase margins in the residential lending segment could be beneficial while the RBA maintains expansionary monetary policy of 1.5%.  

This is because higher interest rates on mortgages may divert capital from housing, making cheap credit available for other projects such as infrastructure, which would help to grow the economy.

The effect of interest rates on the housing market continues to be a concern for the RBA, who last month noted a “considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities”. Meanwhile, the CoreLogic Hedonic Home value index saw a decline in the Melbourne unit market in November of 3.2%, and the Brisbane unit index was down 0.9% in the same period, suggesting construction and growth in the unit segment may start to moderate.

Tomorrow marks the release of Q3 GDP figures, with numbers expected to be flat, or even negative among low levels of demand and private investment. One positive for certain markets around Australia is the increase of the commodity price index, which rose to its highest level since May 2016 in October.

However, among sluggish economic growth, low wage growth and inflation, a rate rise from the RBA may not be expected until at least the second half of 2017 or potentially the year after.

 

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Eliza Owen is the Market Analyst for Onthehouse.com.au.

 

 

 

 

 

Published:6 December, 2016.