Yesterday (5 February 2019), the RBA Board decided to leave the cash rate unchanged at 1.50 per cent for its 26th consecutive meeting.
“Inflation remains low and stable. Over 2018, CPI inflation was 1.8 per cent and in underlying terms inflation was 1¾ per cent,” said RBA Governor Dr Philip Lowe.
“Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices.
“The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual,” he said.
The RBA will next meet on 5 March 2019.
“The RBA’s decision isn’t surprising, given the state of the economy,” said REA Group Chief Economist Nerida Conisbee.
“There’s still very mixed economic data out there – unemployment is now at just 5 per cent and Sydney has hit its lowest unemployment rate since 1974, when it was 3.5 per cent,” she said.
“The economy is not strong enough for an increase but not weak enough for a cut. GDP growth was strong in June but weaker in September.”
While most experts are expecting a rate cut soon, 46 per cent of realestate.com.au visitors surveyed in December predicted rates would stay on hold in 2019.
Finsure Managing Director John Kolenda said that, while the RBA has kept official rates at the all-time low of 1.5 per cent since August 2016, the pressure is on to reduce rates again and the central bank has room to move.
“There is not a single shred of positive economic news at the moment,” Mr Kolenda said.
“This is increasing pressure on the RBA to lower rates, particularly when you weigh up all the negative factors which include the coming federal election, the response to the final report of the Hayne Royal Commission, the falling property market and external matters such as the US-China trade war and Brexit.
“There are just too many headwinds at the moment. You also have banks increasing their rates independently of the RBA due to cost of funding issues. Consumer confidence is the strongest economic indicator and, as we can see from downturns in retail spending, consumer confidence is lagging.”
Mr Kolenda said the timing of the next RBA move will hinge on the federal poll, which must be held by May this year.
“I don’t think they would cut rates during an election campaign,” he said.
“If it does happen it would most likely be in the third quarter, unless there is a material change in the overall economy.”
“The RBA has looked past the housing downturn, which has gathered some momentum over the past three months, to hold the cash rate firm at their first meeting this year. The hold decision was widely anticipated, considering a subtle uplift in CPI and steady labour market conditions; however, financial markets are increasingly leaning towards the next move from the RBA being a cut rather than a hike” said CoreLogic Head of Research Tim Lawless.
“With CoreLogic’s January hedonic index revealing national dwelling values are falling at the fastest rate since the GFC, while Sydney and Melbourne’s rate of decline is now the most rapid since at least the early 1980s, there is the potential the RBA may be becoming less comfortable with the performance of the housing sector. Add to this a consistent downtrend in dwelling approvals, weakening consumer sentiment and softer retail trade figures, and it looks like the household sector could start to weigh down economic growth.
“The weeks preceding the RBA meeting saw several smaller lenders pushing mortgage rates higher in response to persistently high funding costs, following an average 14 basis point rise in owner-occupier mortgage rates since September last year. If we see mortgage rates rising more broadly, we might see the RBA become more willing to consider a rate cut in an effort to offset higher funding costs and support heavily indebted household balance sheets.”
Sally Tindall, research director at RateCity.com.au, said banks have tightened the screws over the last year to make sure people aren’t in loans they can’t afford to repay, but the clampdown has only made the banks hungrier for the right type of customers.
“The serviceability clampdown will have scared some people out of refinancing, when in fact it’s made banks even hungrier for the right type of business,” she said.
“If you live in your own home and own at least 20 per cent of it, it could be time to go mortgage shopping. In a market of supposedly rising interest rates, there are still plenty of low-rate home loans on offer – but only if you’re prepared to walk.
“A lot of people out there probably don’t realise they are what the banks call an ‘ideal’ borrower. If this is you, then you hold the cards in any home loan negotiations.”