'Continued weakness’ in housing influenced May rate cut decision but little guidance from RBA on future rate cuts

Minutes released today from the RBA’s May 1 monetary policy meeting show that the continued weak housing, construction and mortgage conditions were factors in the bank cutting the cash rate by 50 basis points, though the pace of house price decline may be slowing.

However, Westpac chief economist Bill Evans says the minutes provide no guidance "to suggest either that a cut can be expected next month or that the board, having cut by a larger than expected amount is prepared to wait and assess the impact over a few months before moving again". 

"Our current forecast is for rates to bottom out at 3.25% with cuts of 25bps in both July and September. However, the specific timing of these moves and whether the Bank eventually decides to go a little lower is most uncertain with three weeks between now and the June Board meeting and in particular global developments highly volatile," he says.

The May 1 minutes note that “members were briefed on the continued weakness in the housing market generally and residential building activity in particular”.

The minutes also note that “demand for housing finance had eased in the past few months and recent data suggested that dwelling prices had continued to decline, although there were tentative signs that the pace of decline had been more gradual overall in recent months”

“Despite dwelling prices declining relative to incomes and rises in rental yields, forward-looking indicators implied little prospect of an imminent recovery in housing construction.

“Information from liaison suggested that households were unwilling to commit to contracts for new dwellings because of concerns about job security and declining dwelling prices,” say the May minutes.

The weakness in the housing market was noted in both the April and March minutes after the Reserve Bank reported in February that “there were signs of [house price] stabilisation in some major cities around the end of the year”.

In April the RBA noted “soft overall conditions in the housing sector”.

In March, the RBA said the “housing market remained soft, with auction clearance rates in February broadly unchanged from late 2011.

“Housing credit continued to grow at a slower rate than nominal income.”