Commentators divided on RBA's motives

by Calida Smylie04 Jun 2014
Housing industry commentators are divided whether the Reserve Bank of Australia’s decision yesterday meant they were comfortable, calm or panicking.
 
In a widely-predicted decision, the RBA board announced yesterday afternoon it would leave the official cash rate on hold for the tenth consecutive month at a record low 2.5%.
 
“The RBA board has a high degree of comfort with the current cash rate of 2.5%, given an environment where competing factors are influencing Australia's overall economic performance,” said Housing Industry Association chief economist Dr Harley Dale.

“It is encouraging that today the bank confirmed the message that interest rates are on hold for a considerable period of time. A period of stability will maintain a positive environment for residential construction activity to boost economic growth throughout 2014 and into next year.”
 
Dale hoped the interest rate statement will reduce recent talk and uncertainty around the direction and timing of the next interest rate move, which is “unhelpful” for sustained residential construction recovery.
 
But Mortgage Choice put the reason the official cash rate was left on hold down to a “significant drop in consumer confidence”.

Mortgage Choice spokesperson Jessica Darnbrough said the RBA's decision to leave the cash rate on hold would have “failed to surprise borrowers” after consumer sentiment plummeted in May due to an unfavourable response to the recent federal budget.

The latest Westpac Melbourne Institute Index of Consumer Sentiment fell by 6.8% to 92.9 – the lowest level since August 2011.

According to the index, 59.2% of Australians said they expect their family finances to worsen over the coming 12 months as a result of the budget.

Darnbrough said the significant amount of criticism that has been aimed at the budget could encourage the RBA to leave the cash rate on hold for the foreseeable future.

“In the months leading up to the Federal Budget, many economists had predicted interest rates to rise in the not-too-distant future. However, this may no longer be the case. Instead, the Reserve Bank is likely to leave rates on hold for some time and wait and see what happens to consumer sentiment over the coming months,” she said.

RBA governor Glenn Stevens said yesterday that the current accommodative stance of monetary policy was appropriate for some time yet, given the current outlook for the economy and the significant degree of monetary stimulus already in place.

But Laing+Simmons general manager Leanne Pilkington said the RBA board has kept a “calm head amid alarmist claims” from some housing industry commentators.
 
“Over the past few days we have been confronted by news stories arguing the property boom is over, that confidence is plummeting and other overly dramatic claims,” she said.

“Taking a step back, those experienced in the industry know that it's simply business as usual for the housing market.”

Research conducted by RP Data found dwelling values slid slightly backwards over the month of May, with Australia's capital cities recording a monthly fall of 1.9%.

Across most of the individual capital cities, dwelling values were also down over the month, led by Melbourne with a 3.6% reduction in values. Over the past three months capital city dwelling values are up 0.7%, the lowest rolling quarterly rate of dwelling value appreciation since the three months ending June 2013.

However, Pilkington said a slight easing in house prices in May is simply a reflection of the current state of the market, with factors like seasonality and prevailing affordability issues exacerbated by a tough budget playing their part.

 “There are still impressive prices being achieved by vendors and buyers continue to enjoy an equal balance of power in negotiations. In short, the market keeps on ticking over and today's rate decision should see this continue over the winter months,” she said.

Governor Stevens said on present indications, the board decided the most prudent course is likely to be a period of stability in interest rates.

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COMMENTS

  • by Brad Quilty 4/06/2014 9:21:49 AM

    If you read the second last paragraph of the RBA statement, it quite clearly states their expectations around 'stability':

    "Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years." http://www.rba.gov.au/media-releases/2014/mr-14-10.html

    quite specific don't you think?