Archive for category: Knowledge Centre

Jack Derwin| Business Insider| 4 February 2020

https://www.businessinsider.com.au/rba-february-rate-decision-cut-hold-2020-2

Interest rates are on hold for now, but another cut is likely coming.

The Reserve Bank of Australia (RBA) announced on Tuesday that it had kept the official interest rates at 0.75% at its February meeting.

“With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting,” RBA Governor Phillip Lowe said in a statement.

Lowe and the rest of the RBA board seem satisfied for now that record low-interest rates are doing enough to stimulate Australia’s economy.

“The easing of monetary policy last year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries,” Lowe said.

“Lower interest rates have assisted with the process of household balance sheet adjustment. They have also boosted asset prices, which in time should lead to increased spending, including on residential construction. Progress is expected towards the inflation target and towards full employment, but that progress is expected to remain gradual.”

While largely in line with expectation, a small number of economists have begun to suspect the RBA might not be as predictable as assumed.

Around one in ten economists had thought the official cash rate would be cut on Tuesday, according to a Bloomberg survey. But despite the broad consensus, there are a growing number of contrarians who doubt the decision remains quite so black and white.

Economists from banks ING, Deutsche and Morgans were all betting on a cut to 0.5%, which would constitute another record low. Given the ongoing, and as yet unquantified, economic damage the bushfires and now the coronavirus will wreak, the RBA could have been inclined to move preemptively.

“[It’s] splitting the difference between what the market thinks and what the RBA thinks,” Morgans analysts wrote in a note issued to Business Insider Australia before the decision. “The RBA thinks the economy is in pretty good shape, the market thinks it’s in need for help, so we forecast one further rate cut but it’ll stabilise there.”

On the other, more popular, side of the debate were all big four Australian banks, flanked by AMP Capital, HSBC, JP Morgan, Morgan Stanley, and UBS. Of those, only UBS and and AMP are pricing in a March cut. The big four are instead anticipating, with the current data, the RBA will wait until April to make an orderly move lower.

“It would be a genuine surprise [if the RBA cut in February]” IFM Investors economist Alex Joiner tweeted. “Data [hasn’t] thrown up any red flags and I personally wouldn’t think near term weakness from exogenous factors will be enough for the RBA to spend the limited policy space it has left.”

Better looking economic indicators heading into the end of 2019 have helped steady market jitters. A fall in the unemployment rate — a key RBA objective — in December helped alleviate some of the pressure for rates to be slashed once again.

“A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3% target range,” Lowe said. “Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.”

However, even while analysts thought there wasn’t a pressing enough case for an immediate cut, they wouldn’t rule it out amid threats to Australian economic growth.

“While we are not calling for an RBA rate cut until April, there is a risk of a rate cut at today’s meeting,” Commonwealth Bank chief currency strategist Richard Grace said in a note. “The RBA is likely to refer to the coronavirus in their accompanying monetary policy statement.”

While the RBA board did, in fact, refer to the coronavirus, it’s keeping its cards close to its chest, acknowledging the outbreak will only “temporarily weigh on domestic growth.”

With the February decision out of the way, analysts will now cast their eyes forward. The market had been pricing in a 50% probability of an April cut and 65% of one in May instead. While consensus may have doubted a February cut, the majority of economists expect the RBA will be forced to cut to 0.5% soon.

Exactly when however is anyone’s guess.

Euan Black| The New Daily| 30 Jan 2020

https://thenewdaily.com.au/finance/property/2020/01/30/first-home-buyers-me/

Soaring property prices “are yet to crush the home ownership dreams of first-home buyers,” says ME Bank.

But they aren’t doing much for the broader economy.

Interest rate cuts and looser bank lending have seen national housing prices rise more than 5 per cent since finding their trough in July.

The strength of the rebound has surprised many analysts and prompted economists to sound the alarm over rising household debt.

But ME’s latest Quarterly Property Sentiment Report found the return of the property boom hasn’t dulled the ambitions of aspiring home owners – even though ABS figures show they are gradually being priced out of the market.

More than half of would-be home owners (51 per cent) plan to buy property over the next 12 months, according to ME Bank’s survey, which canvassed 1000 Australians at the start of January.

ME Home Loans general manager Andrew Bartolo said this showed rapidly climbing prices were instilling a sense of urgency among first-home buyers and had yet to crush their dreams of home ownership.

“In the case of first-home buyers, the recent property price recovery has likely nudged them to get in while they can – as though it’s now or never,” Mr Bartolo said.

“Low interest rates and commentary in the market for the support of first-home buyers may have also contributed to an increase in home-buying intentions,” he added, referring to the Coalition’s first-home buyer scheme. 

The report shows attitudes towards the property market have improved for the third consecutive quarter, increasing three percentage points since the last survey to a net positive (i.e. positive sentiment minus negative sentiment) of 21 percentage points.

Home owners are less concerned about negative equity, too, and reported improved confidence in their general finances.

But more than nine in 10 Australians (92 per cent) believe that housing affordability is still “a big issue in Australia”.

And rising property prices are discouraging spending more than encouraging it.

ME’s findings mirror those of other recent reports.

While devastating bushfires pushed consumer confidence to one of its lowest levels since the GFC, expectations of rising house prices increased 8.1 per cent in the monthly Westpac-Melbourne Institute consumer confidence index.

The sharp jump in house price expectations came after Commonwealth Bank reported that home-buying intentions hit record levels in December, while retail spending intentions flatlined.

“Households remain very happy to spend on housing. But they remain very cautious about spending at the retail level,” CBA chief economist Michael Blythe said at the time.

“And within the overall consumer mix, the preference is to spend on experiences over goods.”

ME’s report found something similar.

Although attitudes towards the property market are continuing to improve, Australians’ “willingness to spend on discretionary items” dropped five percentage points over the quarter to a net negative of eight percentage points.

Mr Bartolo said this showed rising property prices had yet to deliver a positive “wealth effect” to consumers.

Meanwhile, EY chief economist Jo Masters told The New Daily the ongoing house price rebound delivers a weaker wealth effect than past house price recoveries for two reasons.

Firstly, Australians are heavily indebted and have shown a preference for paying off debt rather than spending.

And, secondly, the memory of the recent downturn is still fresh in people’s minds, meaning home owners might place less faith in the sustainability of the recent price surge.

Ms Masters said prices are likely to rise at a slower pace this year, too.

More vendors will want to sell their homes after months of price increases, meaning supply will rise to meet demand, and fewer people will be able to afford a home the longer the rebound goes on for.

“And then for first-home buyers, it’s still an incredibly challenging environment,” Ms Masters added.

“In the last housing finance numbers, it looked as if the pace of first-home buyer approvals was coming off, but the average size of the mortgages being given to first-home buyers was rising, which is consistent with prices going up.

“So it does look like prices have risen to a point where … first-home buyers are a little bit more overstretched and taking longer to get their financing in place.”