Debbie Shankar - 1 Nov, 2016

Interest Rates Likely to Be on Hold Until 2017

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eChoice RBA Commentary for November 2016

The RBA have left the official cash rate on hold at 1.5%.

This decision was based on:

• Housing prices escalating, but mortgage rates and property turnover is lower;

• Australia’s unemployment rate is holding steady;

• Underemployment is rising; and

• Inflation remains low.

Reserve Bank Governor Dr Philip Lowe, suggests that many factors have to deteriorate before he lowers interest rates. Lowe said housing activity would need to continue rising, and labour market and inflation figures fall, before adjusting policy. However, economists do not think that all three of these factors will come into play. Therefore, they are suggesting that interest rates will stay on hold until 2017.

Australian Housing Market Conditions

Mixed conditions are present in the housing market. Property turnover and mortgage growth has fallen. Nevertheless, home prices in Sydney, Melbourne and many other capitals cities continue to increase.

According to CoreLogic data, national home sales were 9.3% lower than 12-months ago. Unit sales have also declined by 14.9%. Dwelling finance commitments also dropped by 1.0% during August 2016, according to the Australian Bureau of Statistics (ABS). Plus, owner-occupier housing finance fell 1.3%, while investment funding increased by 1.0%. First home buyer finance, however, rose by 0.2%.

CoreLogic also suggests that the combined values of homes grew by 1% in September. Home values were also 2.9% higher over the quarter. Over the last 12-months, home values have increased by 7.1%.

High auction clearance rates in Sydney and Melbourne received acknowledgement by the board, along with strengthening house prices. Data also indicates that auction prices in Sydney were around 80% and at 70% in Melbourne. Some of the highest rates seen in 12-months.

Labour Market Statistics

Unemployment in Australia is holding steady at around 5.7%. During August, employment numbers increased by 9,900 according to ABS data. This figure took the number of Australians employed to 11,965,100. During August, unemployment decreased by 400 persons to 721,000. Over the past 12-months, unemployment has fallen by .5%. While this is favourable, underemployment figures concern the board.

Underemployment occurs when employees work fewer hours than their capacity. Board members noted that underemployment is increasing in Australia. Reports from the ABS in August 2016, state that underemployment rose by 0.1% for the quarter, to 8.6%. One of the highest rates ever recorded.

Inflation and Interest Rates

Rates of inflation in most of the world’s advanced economies remain weak. So, why has this low inflation occurred? Well, according to Lowe, low inflation coexists with moderate wage outcomes. Other advanced economies, as well as Australia, have witnessed sluggish wage growth for some time, decades even.

Dr Lowe suggests that low inflation is Australia reflects a slackening in the world economy. An occurrence that is mainly the result of the global financial crisis, which will continue for some time.

Another reason Australia has weak inflation, says Lowe, is our commodity prices have declined, along with oil values. Thus, with headline inflation figures so low many workers have agreed to lower pay rises.

Lastly, globalisation has increased competition, which, in turn, reduces pricing power. As a result, a reduction in the strength of both employees and businesses occurs. These open markets and technological advances mean companies feel they need to keep their prices lower. Otherwise, they risk losing customers. Hence, businesses are fearful of losing local customers to foreign companies.

RBA members expect these factors to continue to suppress economic conditions for months, possibly years. Still, Lowe does expect inflation in Australia to improve gradually. Although, it is highly likely that this will be closer to the 2% mark than 3%. Given this, and that the RBA have a flexible framework, interest rates will remain on hold.

Are you looking for a competitive home loan interest rate? Then talk to an eChoice Broker today discuss your options!

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