- 1 Jul, 2014

The RBA is Waiting to Make a Move

eChoice RBA Commentary for July 2014.

The official cash rate has been left on hold at 2.5 percent. This decision was based on:

– Unemployment rates still being high;
– Uncertainty surrounding the impact of the federal budget;
– Falling mining investment;
– Soft consumer spending; and
– Price growth in the dwelling market easing.

Economist’s are suggesting that the official cash rate will stay at 2.5 percent for most of 2014 before starting to climb in 2015. Predictions that the official cash rate will reach 3.25 percent during 2015 are now beginning to surface.

This comes as the Australian labour market continues to strengthen with employment rates increasing by 1 percent and unemployment remaining steady. Indicators suggest that there will be relatively moderate growth in this sector over the coming months.

The 2014/15 federal budget suggests that the Australian deficit will decrease over the next two years. The forecast is more substantial than first anticipated, and if achieved, could give the Australian economy a more substantial consolidation than originally projected.

Household spending has continued to increase. Retail sales are holding strong with the March quarter almost matching the December quarter. Sales stayed robust during January and slowed during February and March. Retail sales have continued to improve during May. Consumer sentiment however, is said to have fallen sharply over the last month, and is now below average.

Housing construction is continuing to improve with strong residential growth recorded during the March quarter. New dwelling investment is at high levels. However, price growth in the established dwelling market is easing after rapid growth in 2013. Auction clearance rates in Sydney and Melbourne have declined also.

Global and domestic conditions remain without significant change. Based on available data, gross domestic product (GDP) growth in Australia is marginally above trend. This is attributed to strong growth in resource exports, which was not expected to be sustained to such levels.

It is expected that substantial falls in mining investment, and below average growth in consumer demand and non-mining investment will be below trend for some time, before gradually improving. At present, low interest rates are working to support demand, but at this stage it is still difficult to judge how the decline in mining investment and the federal budget will impact on the Australian economy.

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