Reserve Bank keeps cash rate on hold

The Reserve Bank has kept the official cash rate on hold as it waits to determine the impact of June and July’s consecutive cuts on the economy.

The two 25 basis point cuts to a record low of 1 per cent, which came after nearly three years without a change, were blamed on a weakening jobs market and stubbornly low inflation. While today’s hold was widely expected, economists are predicting as many as two more cuts by the end of the year, likely starting in October or November.

“The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected,” RBA Governor Philip Lowe said in his statement.

“Long-term government bond yields have declined further and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.”

CoreLogic head of research Tim Lawless said today’s decision would give the RBA time to assess the effects of earlier rate cuts on the economy and consumer spending, “however there is a strong likelihood of at least one more cut later this year”.

Mr Lawless said the housing market had been a key beneficiary of lower mortgage rates, with prices stabilising over the year before a “subtle rise” last month.

“The improvement in housing market trends can’t be attributed entirely to lower interest rates, there has also been the added stimulus of looser home loan serviceability assessments, following APRA’s decision to scrap the minimum 7 per cent interest rate floor used to assess a borrower’s ability to repay a mortgage, as well as the confidence injection post federal election and tax cuts for low income earners,” he said.

“With mortgage rates set to remain low for an extended period of time, as flagged by RBA Governor Lowe in a speech last month, and potentially move even lower later this year, we are expecting to see the housing market move into a gradual recovery, however with credit policies remaining tight and economic uncertainty still elevated, we aren’t expecting a material acceleration in housing activity or housing values.”

On Monday, former Prime Minister John Howard warned the RBA may have cut interest rates “too far” already, leaving Australia lacking ammunition in the event of another global shock.

That came as a dramatic escalation in the US-China trade war sent shockwaves through global stock markets, with $90 billion wiped off the value of the ASX in two days.

Comparison website Finder’s survey of 46 economists and experts had 96 per cent predicting no change today, but 49 per cent have tipped a final low of 0.5 per cent while 35 per cent believe the cash rate will bottom out at 0.75 per cent.

Finder insights manager Graham Cooke said most experts now believe property prices will rise this year but it was still too soon to tell whether this was merely a “dead cat bounce”. “In finance, the saying is that even a dead cat will bounce if it falls from great heights,” Mr Cooke said in a statement.

“Most economists surveyed foresee small levels of growth across the board, but a few tipped prices to tumble, especially in Sydney and Melbourne where one expert predicted a 7 per cent drop.”

Mr Cooke added that “whether you see this as a falling feline or the beginning of a true rebound, it’s clear that the full effects of the RBA’s recent cuts have yet to play out”. “However, after one of the strongest weekend clearance rates in Sydney in recent months (of) 71 per cent there is definitely a detectable pulse,” he said.

The timing of the next cut could become clearer this week when the RBA announces its revised forecasts and the Australian Bureau of Statistics releases its new lending data for June.

Wednesday’s release by the ABS, which includes data on mortgage lending, should give clarity about whether the first of the RBA’s two 0.25 percentage point cuts have had any stimulating effect on the key Sydney and Melbourne housing markets.

Mortgage lending excluding refinancing fell by 2.4 per cent in May as housing investors kept their hands in their pockets about the time of the federal election. The consensus forecast for June is for a 0.4 per cent improvement, while Westpac’s Bill Evans has tipped a 1.0 per cent improvement.

“Recent interest rate cuts should provide more of a lift as we head into the second half of the year,” Mr Evans said.

Nonetheless, he expects the RBA to next cut in October and again in February, while AMP’s Shane Oliver agrees on February but is tipping November for the first move.

On Thursday the RBA will release its Statement on Monetary Policy, which will include the bank’s updated forecasts for economic growth, inflation and unemployment.

When the bank cut the cash rate in July, RBA governor Philip Lowe said the bank would adjust again “if needed”, which was widely interpreted as the central bank adopting a short-term watching brief.

“The RBA is waiting to see the impact of its June and July rate cuts and the Federal Government’s tax cuts for low and middle income earners, and in particular it wants to see lower unemployment,” Dr Oliver said. / AUGUST 6, 2019

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