Interest Rates Remain Stable

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On Tuesday the 6th of May the RBA announced that interest rates will be on hold again for another month.  The reasons stated being;

Source: XKB

Source: XKB

  • Growth in the global economy was below trend in 2013.  However the advanced economies appear to be firming through 2014.
  • China’s growth has slowed but in line with policymakers objectives.
  • Commodity prices remain at historical highs, whilst some important to Australia have softened, i.e. coal and iron ore.
  • Long term interest rates remain low whilst equity and credit markets have adequate capacity to provide funding.
  • Australia’s economy grew at below trend pace in 2013.
  • Signs consumer spending is picking up, as is housing construction.
  • Business conditions and confidence have improved from the same time last year.
  • Resource sector investment spending is expected to decline.
  • Public spending expected to be subdued.
  • Demand for labour has been weak with the unemployment rate rising.  There is an expectation that there will be some time before this changes with consistent employment increases.
  • Growth in wages has noticeably declined. As a result, inflation has largely been contained and is expected to remain so for the next 1-2 years.
  • Acknowledges that dwelling prices have risen SIGNIFICANTLY over the past year.

RBA Summary:

“Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.”

“In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”

NPR Co. Thoughts:

Whilst the Reserve Bank has noted that residential prices have seen significant growth, a word that should be starting to announce what frame of mind they’re in, there would be genuine concern around the decline in dwelling finance approvals.  This is a part of the economy that the RBA would desperately like to see improve, however concern still arises out of higher unemployment rates.

Total Number of Dwellings Financed Per Month

It would appear that the house price growth whilst causing some concerns, is far from the highs previously experienced in the last decade.  In fact, it becomes patently obvious that the government stimulus package that was offered during the GFC saw annual growth higher than the previous market led boom.  Due to this pull forward effect, many purchasers became concerned about asset prices as well as job security.  As a result, the market trough was almost as deep as that experienced during the first uncertain year of the GFC.  This is clearly evident on the following page which provides a ten year history of quarterly annual growth.  If one was to consider cycles in the context of the national rates, the conclusion could easily be drawn that we are only halfway through the cycle.

However the market is not homogenous and this is clearly evident through the different capital city results in the December Quarter 2013.  

House Price Growth Table.png

The vast majority of growth is being influenced by the Sydney and Perth housing markets which remain the strongest in the country at present.  However Brisbane’s residential cycle realistically has lagged the other east coast capitals and is only now starting to emerge from what has been a deep and difficult cycle.  This also rings true for both the Gold Coast and Sunshine Coast residential sectors where momentum is finally starting to gain sustainable interest

Changes to the Weighted Annual Average 8 Capital Cities House Price Index 2004-2013

The risk of the RBA adjusting interest rates on the back of one market’s strong performance, is the equivalency of the stupidity seen by the stock market moving up or down on one set of data.  The RBA by contrast is much more considered in taking a holistic approach.  They have continued to state that the economy is in transition, and realistically performing below long term averages.  Whilst the economy is in this state, there will be a general reluctance to raise interest rates.

The IMF does however point to a period of general stability among the world’s larger economies.  There is a genuine expectation that the challenges of the GFC have been dealt with, albeit there remains a level of fragility and trust that cannot be ignored.  Certain medium outlook issues such as China’s population peaking in 2026 will have some businesses looking at their strategies, however the urbanisation process being undertaken is unlikely to have been completed in little more than a decade, despite China’s amazing capacity to get things done

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