Australia’s central bank sounds alarm on housing slide, rate cut in play

Graeme Salt Knowledge Centre Leave a Comment

Swati Pandey| Reuters| 19 February 2019

Australia’s central bank sees “significant uncertainties” on the economic outlook as the country’s once high-flying property market nosedives, a major reason rate cuts might be back on the table.

Minutes of the Reserve Bank of Australia’s (RBA) first policy meeting of the year in February showed members spent considerable time discussing the potential implications of the housing downturn on the country’s economy.

Members assessed the effect of the recent price falls on overall economic activity was expected to be “relatively small.”

However, “if prices were to fall much further, consumption could be weaker than forecast, which would result in lower (economic) growth, higher unemployment and lower inflation than forecast,” the minutes noted.

In a cautionary note for the economy, retail sales have disappointed in recent months with the latest data indicating shoppers stayed at home during Christmas, while car sales, a gauge of consumer confidence, are also easing.

Property prices in Australia have fallen consistently since late 2017 led by tighter lending restrictions, after several years of boom sent home values broadly doubling in the major markets of Sydney and Melbourne.

National home prices are now down about 8 percent to levels last seen in mid-2016.

The unpredictability around how consumers would react to potential further losses in housing prices led the RBA to downgrade its forecasts for growth through 2021 while expecting an even slower pick-up in inflation.

“Members noted that there were significant uncertainties around the forecasts, with scenarios where an increase in the cash rate would be appropriate at some time and other scenarios where a decrease in the cash rate would be appropriate,” the RBA said.

“Moreover, the probabilities around these scenarios were now more evenly balanced than they had been over the preceding year, when an eventual increase in the cash rate had appeared more likely.”

The RBA has left interest rates at 1.50 percent since August 2016 and the majority of analysts expect this period of steady rates would extend at least until 2021.

Markets, however, are pricing in a better-than 50 percent chance rates will be cut by year end.

The RBA took heart from strong public investment in infrastructure and a revival in business investment, while a robust labour market was also likely to boost household income.

More worryingly, the RBA noted downside risks to the global outlook had increased with an ongoing Sino-U.S. trade war a “material” threat to world growth.

Australia is heavily leveraged to global trade with China its No.1 trading partner so any deceleration in momentum overseas will likely be negative for its economy.

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