RBA relatively relaxed about the housing market: AMP Capital's Shane Oliver

GUEST OBSERVER

Having just cut rates again last month and with the economy running okay and nothing new on inflation in the last month, it was no surprise to see the Reserve Bank of Australia leave rates on hold at 1.5 percent at its September meeting.

This was the consensus and our own expectation.

The Statement accompanying the RBA’s decision to leave interest rates on hold was little changed bar a bit of tweaking here and there…maybe Philip Lowe will do a bigger re-write when he takes over for the next meeting. 

The RBA continues to see the global economy growing, financial markets functioning effectively and the Australian economy continuing to grow but labour market indicators being somewhat mixed, inflation remaining quite low, an appreciating $A complicating the adjustment in the economy and seems rather sanguine regarding the housing market.

While the RBA’s statement lacks a clear easing bias it is noteworthy that its June statement  (the RBA having just eased in May) was also largely interpreted as neutral with an easing bias only returning (expressed via a reference to the Bank awaiting “further information”) in July ahead of inflation data to be released later that month. So if history is any guide the October statement should be watched for any return to an easing bias ahead of September quarter inflation data due later that month.

Perhaps a surprising aspect of the RBA’s statement is its relatively sanguine comments regarding the housing market. I would have thought the bounce back up in auction clearance rates in Sydney and Melbourne and renewed strength in housing finance would suggest that this year’s rate cuts have reinvigorated the already hot property markets in those cities suggesting the case for another bout of RBA “jaw boning” and possible APRA action to cool things down again. At this stage the RBA appears more comfortable in waiting for surging apartment supply to cool things down.

We remain of the view that the RBA will cut rates again at its November meeting when it reviews its economic forecasts after the release of the September quarter inflation data in late October. The risks to inflation are on the downside thanks to underlying deflationary pressures globally and record low wages growth domestically and the $A is still too high and at risk of further appreciation given the Fed’s endless delays in raising rates again.

However, with economic growth holding up very well – data for public spending, sales, profits and inventories released over the last few days points to June quarter GDP growth accelerating further to 3.5 percent year on year – this is a close call and is now critically dependent on seeing a lower than expected September quarter inflation result. Either way a cut in the cash rate to 1% or below and the adoption of quantitative easing looks very unlikely in Australia.

SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.