Reserve Bank leaves rates on hold in February 2017
The Reserve Bank of Australia has left its cash rates steady at 1.5 per cent for the fifth consecutive board meeting as it prepares to release forecasts showing economic growth picking up and inflation climbing from 1.5 per cent to more than 2 per cent.
In a statement released after the board meeting, Governor Philip Lowe said economic growth was forecast to centre around 3 per cent for the next couple of years, well up from the September-quarter figure of 1.8 per cent and the central forecast of 2.4 per cent in the Scope BusinessDay economists’ forecasting survey.
The Australian dollar lifted to US76.62¢, from around US76.40¢ just before the announcement, as markets widened the odds on another policy easing.
The governor will release his updated forecasts on Friday along with a statement outlining his thinking about the year ahead. He will also outline his thinking in a speech to be delivered in Sydney on Thursday night.
“The unemployment rate has moved a little higher recently, but growth in full-time employment turned positive late in 2016. The forward-looking indicators point to continued expansion in employment over the period ahead.”
Although Sydney and Melbourne house prices were climbing at double-digit rates, Governor Lowe said conditions varied around the country.
In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for a couple of decades,” he said.
While acknowledging that borrowing by investors was climbing again after falling in the wake of moves by the Australian Prudential Regulation Authority to impose tighter standards, he said some lenders were taking a more cautious attitude to lending in certain segments.
Tim Lawless, research director at property specialist CoreLogic, said the decision to leave rates unchanged reflected both rapidly climbing prices and a resurgence in lending to investors.
“With inflation consistently tracking below the bank’s target range for almost three years, it’s likely that the heat in the housing market is one of the primary reasons why the cash rate hasn’t moved lower in an attempt to stimulate spending and push inflation higher,” he said.
“CoreLogic reported capital city dwelling values were 10.7 per cent higher over the past 12 months, which is a substantially higher growth rate than the 7.4 per cent recorded over the same period a year ago. The acceleration highlights that housing market conditions have rebounded in line with the previous rate cuts and the consistent rise in investor participation.
“While any further rebound in the headline rate of growth would be unwelcome, some cities could have used the additional stimulus of a cash rate cut. Housing market conditions in Perth and Darwin have been weak since 2014, with dwelling values having fallen in both cities over the past twelve months.”
Dr Lowe said the positive outlook was supported by the bank’s two previous interest rate cuts in 2016 and the depreciation of the exchange rate since 2013.
An appreciating exchange rate “would complicate this adjustment”.
CommSec chief economist Craig James said there were a number of “hot-button” issues to monitor, including house prices, inflation, the Australian dollar and the global economic outlook.
“Importantly though, the Reserve Bank remains positive. The global economy has ‘improved‘; domestic economic growth is forecast around 3 per cent; and headline inflation is tipped to lift to over 2 per cent in 2017. So while the Reserve Bank is sticking with its ‘neutral stance’, it clearly won’t be cutting rates anytime soon,” he said in a note to clients.
Mr James said CommSec expected the RBA to stay on the interest rate sidelines for the 2017 year.
“If the Reserve Bank was to change rates in coming months, the trigger is more likely to emerge from overseas, probably a development from policies adopted by the new US government,” he said.
“Conversely, if the fiscal stimulus doesn’t emerge in the US, rather protectionist actions are advanced, that could serve to restrain global economic growth, stifle inflation pressures and cause Australia’s Reserve Bank to cut rates to protect domestic activity.”
ANZ Research senior economist Felicity Emmett said she expected rates to remain on hold for some time given persistently low domestic inflation.
While the RBA’s statement was more upbeat on the global economy, on the domestic front, the outlook was largely unchanged.
“Given the bank currently only has the mid-point of its underlying inflation forecasts returning to the bottom of the band over the forecast period, our interpretation is that it maintains an easing bias. But the slightly better global dynamics (albeit in an environment of heightened political risk), the lift to national income from higher commodity prices and the risks around house prices suggest that the bank will not act on that bias,” she wrote.
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