Economists are speculating that the Reserve Bank of Australia (RBA) will leave the official cash rate on hold for between 12 to 18 months. This, the economists say, is to increase economic stability and to get Australia back-on-track financially after a period of unrest.
This month’s RBA decision to leave rates on hold was based on a decline in household consumption, a fall in residential dwelling approval rates, and unemployment rates still being relatively high.
According to data, household consumption has declined over the June quarter with retail sales falling. Consumer sentiment has steadily declined since the beginning of the year. However, looking at the last few weeks, activity seems to be more positive and above average levels when compared to previous weeks.
Residential dwelling approval rates have also declined when compared to recent months. But, in saying this, approval rates still remain consistently high. There is still a great deal of constuction work to be done on approvals that have been given. This suggests that the residential dwelling market and property investment will remain strong for some time.
House price inflation nationwide has been consistent. Property capital growth is not as strong as it was in the last quarter of 2013, but it is remaining robust. The high rate of auction clearance rates witnessed in Sydney have eased. However, Melbourne is now experiencing similar trends to Sydney with housing auction rates rising.
Business conditions remain at above estimated levels. Investments and investment intentions have been as expected and are gradually picking-up from 2013 levels. But, many businesses are still reluctant to take on significant investment projects until the market improves and demand increases and continues to be strong.
Growth in the non-mining sector is expected to increase due to low-level interest rates. Resource exports are anticipated to grow over the next few years. Mining investment, on the other hand, is expected to decrease. However, at present there is still a higher than expected return in this area.
Underlying inflation has remained consistent, despite marginal increases, and is on target. Domestic inflation is subdued. This reflects that there is a gap in the labour and produce markets. However, unemployment and participation both remain steady. Improvements in the labour market are minimal. There is notable capacity in the labour market.
The decline of the exchange rate has seen import prices increase and these prices are being passed on to consumers. Inflation is expected to decrease since the carbon tax has been abolished.
The board suggest that inflation will remain consistent over the next 2-years. This factor, and others, are leading the board to predict that rates will remain on hold for some time so that the economy can continue to stabilise.
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Written by eChoice