No change in rates from the Reserve Bank yesterday, now for what’s expected to be a weak GDP figure from the December quarter national accounts to be released later this morning.
No one expected a rate cut yesterday, despite some odd media suggestions that the RBA did nothing ‘despite’ signs of a slowing economy, suggesting there were faint hopes of a cut.
The slowing pace of activity was recognised a month ago by the central bank and it remains on hold, but with perhaps a slight bias to cutting rates if the jobs market shows signs of slowing.
Household spending (consumption) remains the big unknown – especially since the RBA last month described working out just what was going on with household consumption as “challenging”.
RBA Governor, Phil Lowe has a major speech on the housing market and the economy this morning (9.10am in Sydney) during which he will repeat the point that while falling house prices remain a concern, its the weakness in household income and spending that remains a worry.
The household income and spending data in today’s December quarter national accounts will be more of a concern that the headline GDP figure which could be negative or as high as 0.4% (See separate story).
“The main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling housing prices in some cities. A pick-up in growth in household income is nonetheless expected to support household spending over the next year,” Governor Lowe said in yesterday’s post-meeting statement.
“The adjustment in the Sydney and Melbourne housing markets is continuing, after the earlier large run-up in prices. Conditions remain soft in both markets and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so.
“At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased further. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.
“Inflation remains low and stable. Underlying inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual and to take a little longer than earlier expected. The central scenario is for underlying inflation to be 2 percent this year and 2¼ percent in 2020. Headline inflation is expected to decline in the near term because of lower petrol prices.
“The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.
“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” yesterday’s statement concluded.
AMP Chief Economist, Shane Oliver isn’t as sanguine as the RBA seems to be about housing in particular.
He wrote in a comment yesterday afternoon after the RBA decision was released.
“Our view is that RBA is underestimating the impact of the housing downturn on the economy – particularly in terms of its impact on consumer spending – and as a consequence, we still see weaker growth and lower inflation than the RBA is forecasting.
“Consistent with this we have seen a run of soft data this year and corporate profit results reflecting difficult conditions particularly around the housing and consumer sectors.
“As a result, our view remains that the RBA will cut the cash rate to 1% by year-end,” Dr. Oliver said in forecasting two rate cuts.
