Saturday, 7 March 2015

Interests rates on hold – for now

Official rates on hold following February cut
Weak recent economic data indicates further rate cuts likely
Housing market activity rising as confidence lifts with falling rates
The Reserve Bank has decided to leave official interest rates on hold over March following its February rate cut.
The Bank cut rates last month after 16 consecutive months on hold reflecting growing concerns over the performance of the national economy.
Official rates will remain at the record low of 2.25 percent despite recent data indicating a further weakening in the economy.
The ABS reported a national unemployment rate of 6.4 percent over January – the highest monthly rate for 12 years.
ABS wage index data also points to a stagnant economy with the 2.5 percent growth over 2014 the lowest annual result recorded in the series. 
Australia’s low growth, low inflation economy was validated by ABS CPI data which recorded minimal 1.7 percent growth over 2014.  With lower fuel costs yet to impact the general economy the inflation rate is set to remain low and likely weaken which will act to reinforce underlying low wages and profits growth.
High budget deficits constrain policy makers’ capacity to stimulate economic growth leaving the heavy lifting to monetary policy. 
Other recent data however has been more encouraging.  Although capital city home building approvals fell over December, an annual increase of 15 percent was recorded over 2014.
Despite generally underperforming local economies, early signs are that housing markets have commenced 2015 positively.  Auction activity in Sydney, Melbourne and Brisbane has been solid to strong with the Sydney market remaining particularly robust.
Although rates remain on hold over March the bias for future action from the Bank clearly remains downwards. Much will depend as usual on measures of economic activity - particularly unemployment rates.
Rising housing market activity on the back of lower mortgage rates, may present the Reserve Bank with a dilemma however with further rate cuts potentially fuelling strong prices growth particularly in the Sydney market.

Dr Andrew Wilson is Domain Group Senior Economist