Originally published by AMP Capital
Surprise, surprise! The July RBA Board meeting saw it leave interest rates on hold at 1.5% for a record 21 meetings or 23 months in a row.
While the RBA sees recent Australian data as consistent with its forecast for growth around 3.25% and is upbeat on the jobs market, it continues to see the outlook for the consumer as uncertain and seems a little less confident about the global outlook with worries about some emerging countries adding to trade fears.
On the housing market the RBA remains surprisingly relaxed about falling prices – characterising them as “little changed over the past six months” on a nationwide basis - and still does not appear to be too fussed by the tightening in lending standards now underway. Its doubtful though that the further tightening in lending standards will be offset by a continuing decline in “the average mortgage interest rate on outstanding loans” as the RBA seems to be implying, as the latter is simply occurring as new borrowers have lower rates than borrowers from say five years ago whereas the tightening in lending standards around income, expenses and total debt will act to slow the number of new borrowers who can get into the housing market.
The RBA also appears to be a little more perplexed by the rise in money market rates seen in recent months seeing at as driven by “other factors” than just the US and unclear as to how long it will persist. The problem is that it is resulting in higher mortgage rates for some borrowers (with the big banks likely to move too) at a time when the property market is already weak and its harder to get a loan. If the rise in money market funding rates proves to be structural (due to say regulatory changes) then its another reason for the RBA to be cautious in raising interest rates and would point to the need for easier RBA policy over time than would otherwise be the case.
Overall, there is nothing in the RBA’s latest statement to suggest an imminent change in monetary policy.
While a brightening outlook for mining investment, strengthening non-mining investment, booming infrastructure spending and strong growth in export volumes argue against a rate cut, topping dwelling investment, uncertainty around the consumer, continuing weak wages growth and inflation, falling home prices in Sydney and Melbourne, tightening bank lending standards and the threat to global growth from a US driven trade war all argue against a hike. So it makes sense for the RBA to remain on hold.
We remain of the view that an RBA rate hike is unlikely before 2020 at the earliest. And given the weakness in home prices and the negative wealth effect that will flow from that its premature to rule out the next move in official rates being a cut.