Debbie Shankar - 1 Dec, 2015

The Reserve Bank Sits Idle at 2%

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eChoice RBA Commentary for December 2015

The RBA have left the official cash rate on hold at 2.0%.

This decision was based on:

o Home prices readjusting;

o Investment declining;

o A marginal decrease in unemployment;

o A lower than expected level of growth; and

o The Reserve believing that a rate drop, at this time, would have little impact.

The Reserve Bank Of Australia (RBA) has left the official cash rate on hold at 2%. This is attributed to the fact that evidence is surfacing which points towards the Australian economy starting to ‘rebalance’ itself.

Evidence includes the readjustment of home prices across the nation, with Sydney and Melbourne dwelling prices beginning to fall. Investor excitement is also easing, and the unemployment rate is decreasing with more jobs being advertised. In addition, inflation, the Australian dollar’s exchange rate and the economic outlook for business appear to be positive.

Many economists suggest that if the RBA had of lowered rates further this would have given them little room to move should they need to in the future. But, by waiting to see if the Australian economy readjusts, gives the Reserve a greater margin should the Australian economy start to look like it’s struggling.

Home Loans and Auction Rates

The RBA feel that the current level of home loan interest, which is low despite major banks increasing their rates, is continuing to support the housing market. While auction clearance rates and housing price growth in Melbourne and Sydney is declining, housing prices are remaining steady in other capital cities.

The lending standards of banks have been tightened in response to the changes that the Australian Prudential Regulation Authority (APRA) has made to investment home loans and the amount of holding capital that major Australian banks now need to reduce their financial risk. As a result, a weakness in investment has surfaced with investment falling by 9% over the last quarter. However, investment services are expected to increase during 2016-17.

Major Australian banks increasing their interest rates has had little impact on residential construction and non-mining investment. But, political uncertainty is said to have impacted on non-mining investment, with an Australian leadership change occurring. However, The Reserve feels that the lowering of the official cash rate will do little to increase investment demand in this area.

Annual Australian Growth

Annual growth is significantly lower in Australia than the 3.1% that was estimated. Instead, Australia has recorded an annual growth rate of around 2.3%. The good news though is the nation has now had 23-years of continuous growth.

The outcome for Australia, overall, is said to be positive. The nation is performing well when compared to other countries. The Australian economy is growing faster than the US, Germany and Japan. In addition, Australia still has low-interest rates, petrol prices and a lower Australian dollar value. So the nation is in a good position to manage its economy well and any transitions.

Economists Predictions for 2016

Many economists are suggesting that the RBA will leave rates on hold for 2016. This, say economists, will allow for national economic growth to rise from 2.3% to 2.7% in 2016, and then to the ideal rate of 3% in 2017. However, economists are warning that a rise in dwelling investment, strong export growth and a modest expansion in business investment is required to deliver a growth forecast of this level.

Employment in 2016

Employment growth during 2016 is expected to be at around 1.8%. This rate of growth is expected to flow into 2017, which means that the unemployment rate should fall to 5.8% during this year.

The Australian Budget Deficit

A rise in economic growth should reduce Australia’s budget deficit by 2.9 billion to $35 billion during 2015-16, and by almost $9 billion to $26 billion in 2016-17. While many economists are predicting that the official cash rate should remain steady, some are suggesting that it may hover between 1.5% and 2.75%. But, the overall consensus is, if there is any movement in the cash rate it will be minimal.

Home Prices and Dwelling Investment

House prices across the nation, are expected to hold with marginal price increases. The pace of dwelling investment is expected to fall from 9.7% in 2015 to 2.2% in 2016, and down to 1.4% in 2017.

Most economists predict that independent bank rate hikes won’t be a common occurrence. It is also expected that the mid-November 2015 move by the Majors to increase investment and owner-occupier interest rates in order to cover APRA capital holding demands, won’t have much of an impact on mortgage holders over the opening months of 2016.

Export and Business

Australia’s export volumes are expected to grow by 7.4% during 2016, and by 6.9% in 2017. Trade volumes, though, are expected to fall by 3.1%, before they pick-up in 2017 by 2.4%. Export growth during 2017 is anticipated to add 1.3% to the growth of the Australian economy over the next two years.

Business investment is anticipated to fall to 6.5% during 2016, and by 1.7% in 2017. The change in Australia’s leadership is expected to have a positive effect on business investment long-term.

Overall, economists are suggesting that there is a less than a 20% chance that Australia will experience a recession in the next 10-years. The nation’s greatest risk, at the moment, is the Chinese economy having a harder-than-expected landing from its decline, or that the Chinese Yuan will experience a steep devaluation.

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