Chris Kohler| Domain| 1 May 2018
The Reserve Bank has left official interest rates on hold in May for a 19th-consecutive meeting, deepening the record-breaking period without a rate movement.
The central bank opted to again leave the official cash rate on hold at 1.5 per cent, where it has sat since August 2016, and RBA governor Philip Lowe remains the longest-serving governor in RBA history to have not moved the cash rate.
“Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas,” Governor Lowe’s statement read.
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.”
The statement also commended APRA’s “supervisory measures and tighter credit standards”, which governor Lowe said have been helpful in containing the build-up of risk in household balance sheets – “although the level of household debt remains high”.
The “no change” result had been guaranteed by the economics community. The market had priced in a zero per cent chance of any move from the RBA in May.
Any other opinion has been difficult to sustain, according to Commonwealth Bank chief economist Michael Blythe, since Lowe made his intentions clear by noting “the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy”.
“More fundamentally, the data flow over the past month has tended to surprise on the low side,” Mr Blythe commented this week.
“Inflation rates remain low and progress in winding down the unemployment rate has stalled for now at 5.5 per cent.”
When will the RBA hike?
The central bank board has continued to make it clear it expects the next interest rate move to be an increase, rather than a cut. Comments in the April meeting’s minutes included an explicit reference to that view.
But almost no consensus exists as to when that hike will arrive – Commonwealth Bank expects it later this year, UBS predicts late 2019, and AMP forecasts no move until 2020.
Here’s how those three experts make their case:
Commonwealth Bank’s Blythe expects a “modest” rate rise cycle to begin on Melbourne Cup Day [November 5], and see the cash rate hit 2.5 per cent in early 2020, but admits his forecast could be pushed back.
“To get that first move we need to see some reduction in underemployment and confirmation that the price and wage cycles have turned,” Mr Blythe said. “So the risk to the start date is that it slips back into 2019.”
And the process will be heavily influenced by the sensitivity of households to those interest rate moves, which means “a drawn out rate rise cycle that peaks short of the 3.5 per cent neutral rate nominated by the RBA”.
UBS economists George Tharenou and Carlos Cacho expect the RBA to lift interest rates in the second half of 2019, with a weak housing market restricting any earlier movement from the central bank.
“We highlight a range of ‘early indicators’ are together showing the housing market continues to weaken,” Mr Tharenou and Mr Cacho wrote to clients this week.
“This includes auction clearance rates tending down to around a five-year low of ~60 per cent, housing credit at a four-year low dragged by a slump in investors, prices falling for the longest [period] since 2012, and most notably industry data on owner-occupier home loans dropping in March.”
UBS also notes the recent tightening of mortgage lending standards as “already having a negative impact”, and sees further tightening ahead.
AMP chief economist Shane Oliver, now sees no movement until “sometime in 2020”.
Efforts from the banking regulator – APRA – to bolster debt markets and tighten lending standards have taken the pressure off the Reserve Bank, Dr Oliver said.
“We had been expecting the RBA to start raising rates in early 2019 but with the further tightening of bank lending standards effectively doing the RBA’s work for it and growth likely to remain below 3 per cent and inflation around 2 per cent for now, we don’t see an RBA tightening until sometime in 2020,” he forecast.