A continuing strong housing market was one of the factors why the Reserve Bank board decided to keep the cash rate on hold this month – and likely for some time yet.
The board’s May monetary policy meeting minutes, released yesterday, revealed board members believed the housing market is an area of strength in the economy, despite a decline in recent figures.
“Although the most recent data had indicated a decline, dwelling approvals remained at high levels and the flow-on to commencements pointed to strong growth in dwelling investment in the first half of 2014,” the board said.
“Across Australia, housing price inflation had eased somewhat in recent months from the earlier rapid pace, with auction clearance rates edging back and housing loan approvals stabilising. Other indicators, such as turnover, first home owner grants and loan approvals for new housing, remained consistent with strong demand for both established and new housing.”
The board has kept the cash rate on hold for the ninth consecutive month at a record low 2.5%, and indicated it would continue to do so because of its impact on the economy and the “significant degree” of monetary stimulus already in place to support economic activity.
The board members said credit market conditions were “very favourable” in most markets, with corporate spreads in Australia approaching pre-crisis levels. In the case of recent issuance of residential mortgage-backed securities in Australia, several securities involved mortgages written by non-bank originators, they noted.
The board observed the global economy and major currencies had changed little over April, with volatility at multi-year lows, and the funding composition of Australian banks had changed little over recent months.
While the inflation outcome for the March quarter was a little lower than most analysts had expected – after a surprisingly high outcome for the December quarter – the board said deciding to leave the cash rate unchanged at recent meetings and the expansionary setting of monetary policy continued to have the expected effects on economic activity.
“Notably, a sustained increase in dwelling investment was in prospect, consumption had strengthened a little and business conditions were around average levels. Recent developments had indicated that the economy had evolved broadly in line with earlier expectations, resulting in little change in the updated forecasts for activity and inflation.
“Given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the board considered that the current accommodative stance of policy was likely to be appropriate for some time yet.”