RBA may not have hit floor on rates

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The RBA says it feels the decision to maintain the official cash rate at 3% at its last meeting was ‘prudent’, but admits the inflation outlook will provide scope to ease further, ‘should that be necessary to support demand’.

Speaking to the House of Representatives today, governor Glenn Stevens told attendants that housing investment is likely to strengthen in coming months, given that several factors are supportive, but warned that it’s still early days.

“Interest rates are low, housing prices are tending to rise, gross rental yields have increased, population growth remains strong and is even picking up a little. Admittedly, we are as yet very early in this phase.”

Looking ahead, Stevens said it appears the peak in the level of resource sector investment is close.

“It is a very high peak, but we do not think that there will be a rapid decline in the near term after the peak. However, it seems pretty clear that this type of investment will not be adding to demand for much longer.”

Following on from this, he said there are good reasons to expect business investment in other sectors will strengthen in ‘due course’, but warned the available indicators at present do not suggest that’s going to happen in the very near term.

“We will get another reading on the investment outlook next week. The outlook for public spending is being constrained as a result of the budgetary restraint being pursued by governments. It is also noteworthy that in several sectors of the economy a combination of factors is putting pressure on business models, and firms have been responding with an emphasis on lifting productivity and paring back costs. This process, while unavoidable, doubtless feeds into measures of sentiment.”

That said, Stevens noted household consumer sentiment has been growing since the middle of last year and is currently ‘a bit’ above longer-run average levels.

“Admittedly, households do not feel the same ebullience they did for some years prior to the financial crisis in the major countries. But that degree of confidence, with its associated patterns of saving and increasing leverage, was unusual, and is not likely to recur.”

The RBA eased monetary policy further in the last quarter of last year, reducing the cash rate six times over the past sixteen months, for a total decline of 175 basis points.

However, Stevens said, allowing for some change in the gap between the cash rate and other rates, lending rates have fallen to be ‘not far’ from their historic lows.

“The share of household income devoted to interest payments has likewise declined considerably. Indeed housing ‘affordability’ as conventionally measured, for purchasers, has improved a lot over the past two years. That represents quite a substantial change in policy settings. It is having an effect. Housing prices have been rising since last May, having declined for a period prior to that.

Overall, Stevens said there's a positive level of interest rate stimulus in the pipeline.

“At its meeting earlier this month the board judged that it was sensible to allow it time to do its work. The board believed that the inflation outlook, at least as we assess it at present, would provide scope to ease further, should that be necessary to support demand. But for now, the board decided it was prudent to sit still.”

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