- 5 Jul, 2017

Official Cash Rate Sits Tight at March Meet

RBA leaves the official cash rate on hold at 1.5%.

This decision was based on:

Australia’s wage growth remaining low;

Unemployment staying consistent at 5-6%; and

The housing market being one to watch with construction leading the domestic economy.

The Reserve Bank of Australia (RBA) remain confident that the Australian economy will hold steady, avoiding recession. In fact, they are now suggesting that the economic contraction in September, was just a blip on the Australian radar. This blip was due to several factors including lower levels of construction because of poor weather. Consequently, the RBA will closely watch housing, as construction is at the forefront of the domestic economy. Nonetheless, while gross domestic product growth (GDP) will increase over 2017, wage growth and unemployment won’t change much.

Gross Domestic Product Growth and Inflation Forecasts

Based on data collected by the Reserve and Australian Bureau of Statistics (ABS), forecasts indicate a strengthening economy. Thus, Australians should begin to see improvements over the next two years.

Forecasts

Dec 2016 Jun 2017 Dec 2017 Jun 2018 Dec 2018 Jun 2019
GDP Growth 2% 1.5-2.5% 2.5-3.5% 2.5-3.5% 2.75-3.75% 2.75-3.75%
Unemployment 5.8% 5.75% 5-6% 5-6% 5-6% 5-6%
CPI Inflation 1.5% 2% 1.5-2.5% 1.5-2.5% 1.5-2.5% 2-3%
Underlying Inflation 1.6% 1.75% 1.5-2.5% 1.5-2.5% 1.5-2.5% 2-3%
Average GDP Growth 2.25% 1.5-2.5% 2-3% 2.5-3.5% 2.5-3.5% 2.75-3.75%

Source: RBA and ABS

Overall, data and economic predictions show Australia’s GDP will reach 2.5 to 3.5% by December 2017. The RBA suggest low-interest rates, declining resource sector drag on growth and rising exports will support this GDP increase. However, GDP growth won’t be enough to decrease unemployment and increase wage growth.

Also, the RBA suggest that Australia’s current rate of unemployment is suppressing wage growth. Why? Well, increased competitive pressure has subdued business growth. Therefore, underemployment is occurring. Data confirms this with a jump in part-time employment during 2016, and a decrease in full-time employment during the December quarter. As a result, business is reluctant to hire workers on a full-time basis until evidence of sustainable demand emerges. Nevertheless, growth in employment is notable in the household services sector.

Housing Market Conditions

While investment into private dwelling construction declined over the September quarter, data suggests poor weather conditions hindered building. Annual data, on the other hand, shows dwelling investments continued to grow at higher than average rates. Furthermore, dwelling investments will be high over the next two years due to the levels of work scheduled for completion. Although, real estate advisors suggest investors need to consider long-term goals as capital returns are likely to be lower. Therefore, investment strategists recommend buying and holding property, especially as the apartment market softens due to an over-supply of dwellings.

Despite this, conditions in the established housing market continue to strengthen. Still, there are significant variations in the national market. For example, Perth and Brisbane have witnessed declining dwelling and apartment prices. Rental yield and rental returns in these regions have also eased. Though dwelling prices in Sydney and Melbourne, where demand exceeds supply, continue to rise.

Thus, increases in housing loan approvals across Australia link directly to investment. Successively, housing credit growth has increased, along with household debt. What’s more, the RBA suggests that mortgage lending levels may need further constraint with tougher regulation. These measures will keep a lid on rising debt levels and housing affordability.

Further Rate Predictions

Banks are seeking to limit their exposure to riskier areas in some markets, so they are tightening their lending criteria. In some instances, lenders are also rationing out capital, making it harder for some investors to get finance. Hence, while economists predict the RBA will leave rates on hold during 2017, they expect banks will raise investor rates.


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