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Interest rates on hold as world watches war in Ukraine

The Reserve Bank of Australia is closely watching the war in Ukraine and has elected to keep interest rates on hold for now at 0.1 per cent.

At its second meeting for 2022 the bank also stressed lending standards needed to be maintained so that “borrowers have adequate buffers”, perhaps hinting at the rate rise many experts are now tipping to come in the second half of 2022.

But in his Monetary Policy Decision statement, Governor Philip Lowe immediately addressed the issue on everyone’s minds – the Russian invasion of Ukraine.

“The war in Ukraine is a major new source of uncertainty,” he said.

“Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand. 

“The prices of many commodities have increased further due to the war in Ukraine. Bond yields have risen over the past month and expectations of future policy interest rates have increased.”

Dr Lowe said financial conditions remained “highly accommodative”, and interest rates remained low, though he noted some lenders had increased fixed rates recently.

“Housing prices have risen strongly, although the rate of increase has eased in some cities,” he said. 

The Australian economy remained resilient, Dr Lowe said, and had picked up following the surge of Omicron cases, with an upswing in business investment underway, along with unemployment dropping to a 14-year low of 4.2 per cent.

“The RBA’s central forecast is for the unemployment rate to fall to below 4 per cent later in the year and to remain below 4 per cent next year,” he said.

Wages have continued to climb but a further uptick is expected as the labour market tightens, but Dr Lowe said it would be a gradual increase as opposed to a surge. 

He also noted there was some uncertainty surrounding labour costs at such low unemployment levels.

Dr Lowe said inflation had picked up but was not yet sustainably within the 2-3 per cent target range.

“The central forecast is for underlying inflation to increase further in coming quarters to around 3.25 per cent, before declining to around 2.75 per cent over 2023 as the supply-side problems are resolved and consumption patterns normalise,” he said.

“The CPI inflation rate will spike higher than this due to the higher petrol prices resulting from global developments. 

“How long it takes to resolve the disruptions to supply chains is an important source of uncertainty regarding the inflation outlook, as are developments in global energy markets.”

Dr Lowe said with wages growth remaining modest and labour costs unlikely to hit a rate consistent with inflation being sustainably at target, the board was “prepared to be patient” and monitor the factors affecting inflation.

Manos Findikakis – Eview Group

Eview Group Chief Executive Officer Manos Findikakis said the bank keeping the cash rate on hold was to be expected given the new events in the world, but he predicted a rate rise by the end of 2022 was looking more likely.

“I’m not saying it’s a good thing or a bad thing, but I think (it will happen) to peg back inflation,” he said.

“But we’ve still got these hurdles we have to get through in the next three to four months. 

“The major hurdle now is Ukraine and how that may escalate. None of us can really predict such a tragedy, you have got to feel for the people. 

“So we’ve got that hurdle, and that’s not a speed bump, that’s an absolute roadblock at the moment.”

Mr Findikakis said Easter and the Federal Election in close succession would also “dampen the market”, but for now he said the property market was stable, although prices had likely reached their peak.

“If you look back to August and September, and October and November, which went absolutely crazy, you’ll see a steep curve in prices,” he said.

“So any vendor that came along in that market, we wouldn’t be sure they’d hit the top of the market.

“We only know we’ve hit the top of the market in the past two to three months because we haven’t seen a huge shift in prices.”

Mr Findikakis said there was still a solid amount of properties coming to market and good buyer inquiry, but the market was “more balanced” now.

International and domestic borders reopening would also have an impact on the property market and while Mr Findikakis said the war in Ukraine would prompt a wait and see attitude among the overseas market, there was already a lot of movement domestically, especially with the WA border due to open on March 3.

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks noted there was no expectation of an interest rate rise at the RBA Board meeting today, and the RBA didn’t disappoint.

“Australia is only a few months into its tentative unwinding of the Covid lockdowns and associated economic restrictions and although the economic rebound has been strong, there’s still a lot of unwinding of the ‘whole of economy’ Covid impacts to occur,” he said.

“The RBA will continue to look to the underlying indicators of long-term real-wage and inflation to try to pick the sweet spot for commencing the process of increasing interest rates.

“The RBA bond buying stimulus process ended during February and they will want to see how the economy fares over the next few months before they make any further adjustments.”

Despite the upbeat commentary from many media commentators, Mr Cocks noted that for every business that did really well during Covid restrictions or since, there are many others that struggled and exhausted most of their cash reserves.

“A period of extended economic growth and the associated optimism in the community would certainly go a long way to top up the reserves that businesses need to survive any down times and we were seeing this momentum starting to build, however we’re now seeing the potential for darker economic clouds to grow over the year ahead.

“The conflict that has sadly escalated in Europe over the last few weeks will be another factor in the RBA considerations.”

In addition to the human impact, Mr Cocks said the major international conflict would have significant economic effects.

He noted these typically included reducing GDP, increasing inflation and higher levels of unemployment in the affected countries and those with close economic ties to the countries affected.

“Even though Australia is a long way from Ukraine, we have already seen a major spike in fuel costs, with more to follow over the weeks and months ahead,” he stated.

“That will flow through to all parts of the economy with higher inflation as a result – this would feed into one of the ingredients for higher interest rates, but there is so much uncertainty about the long term impact on the global economy, the RBA will be trying to assess the likely global economic markers as it navigates its way through this incredibly complex juggling act.”

Mr Cocks also noted the distance from Ukraine would add to the perception of Australia being a relatively safe haven.

This would likely increase the growth in international arrivals, which had already become evident since Australia re-opened its borders.

“Increased international demand will buffer the potential for a downturn by increasing competition for available housing stock,” he said.

“The reduced level of total new construction over the last two years will also add more pieces to the jigsaw.

“All of this is at a time when the Australian real estate industry is seeing a clear slowdown in the rate of growth of housing in many of the major markets, with CoreLogic today reporting that prices in Sydney and Melbourne have flattened even before the RBA taps the brakes.

“Yes, the banks have already started repricing some loan products to make loans more expensive, but the RBA will be very sensitive to the potential to change what it hopes to be a balanced and managed stabilisation of the housing sector, into a rush to the exits.

“That will benefit no-one, so we can expect the RBA to maintain its watchful and cautious approach for some time yet.”

Andrew Acton – Explore Property

Explore Property Group Leader Andrew Acton noted the monthly monetary policy update was beginning to feel a bit like ‘Groundhog Day’ but agreed the mention of lending criteria could hint at an interest rate hike to come.

“There’s a lot of talk that we may see something in the new financial year, but if so, I imagine it would be a small increment just to see us start moving down that track,” he said.

Noting the world was in a state of flux at the present, Mr Acton also pondered whether the RBA might leave any rate rise until around Christmas in order to determine what was going on in the world economy, especially with inflation and the current situation in the Ukraine.

“Any rise would be a small increment, so they might just want to ride it out until Christmas to see how we’re positioned later in the year.”

Geoff Lucas – The Agency 

The Managing Director and Chief Executive Officer of The Agency Geoff Lucas said the war in Ukraine was another factor for the bank to consider when assessing the state of the economy but he tipped a rate rise would come late in the year.

Mr Lucas said The Agency had noted a lift in the number of properties coming to market, particularly along the Eastern seaboard.

“We’re seeing that translate into greater buyer choice, increased days on market and a slight reduction in auction clearance rates,” he said.

“But all within a fairly healthy real estate market.

“We expect supply to continue to be strong as we have a late Easter that will run into the election period in May. So we’re seeing a lot of vendors wanting to come to market prior to that Easter and election period.”

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.

Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.