February's RBA rate decision: The experts make their predictions

February's RBA rate decision: The experts make their predictions
February's RBA rate decision: The experts make their predictions

Ahead of the Reserve Bank of Australia’s (RBA) February announcement, Property Observer asks the experts what they predict will happen to the interest rate – with a single answer across the board.

Shane Oliver – Head of investment strategy and chief economist, AMP Capital 
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WE’VE SEEN CLEAR EVIDENCE THAT INTEREST RATE CUTS HAVE STARTED TO GAIN TRACTION

I think they’ll leave the rate on hold – and there are several reasons. Firstly, the last rate cut was now back in August – it’s been about six months with rates on hold. Given that the Reserve Bank has already cut interest rates to record lows, it’s unlikely that they’ll like to drop them further.

I think the reality is that over recent months, we’ve seen clear evidence that interest rate cuts have started to gain traction. Housing prices picked up in the last quarter of last year, and there’s now evidence that interest rate cuts have flowed through to housing construction activity.

Consumer and business confidence has also bottomed out, while retail is beginning to pick up. The strong Australian dollar was a concern, but we have seen that weaken – in fact, last week we saw the Australian dollar drop below US 88 cents, for the first time since 2010. That coupled with strong indicators in the economy will leave the Reserve Bank feeling confident.

We might see rate hikes in the December quarter, perhaps around October. Right now, the economy is still probably not strong enough for an interest rate increase. We’ll be looking at at least 12 months of rates on hold.

 

Angie Zigomanis  – Senior manager, residential, BIS Shrapnel Angie-Zigomanis--porfile

UNDERLYING INFLATION IS STILL LIKELY TO BE AT A COMFORTABLE LEVEL FOR THE RESERVE BANK

We do not expect the Reserve Bank to change interest rates at its February meeting. Headwinds still face the Australian economy. Resource sector investment is estimated to have peaked and is now tapering off, while growth in other sectors of the economy is not yet picking up at a pace to sufficiently offset this decline in the short term.

Nevertheless, there are signs that the current levels of interest rates are doing their job. After declining in 2011 and 2012, house prices have stabilised and have been growing in some cities in 2013. This is encouraging new dwelling activity, with an upturn in residential construction nationally now appearing to be entrenched.

While inflation for December was a little higher than most analysts expected, there were some “one-off” factors that helped to drive the numbers, and underlying inflation is still likely to be at a comfortable level for the Reserve Bank. As a result, we expect the cash rate to be held at current levels for now.

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Cameron Kusher – Senior research analyst, RP Data cameron_kusher_new

WE COULD SEE AN INCREASE IN THE INTEREST RATE LATER THIS YEAR

Obviously [the other week] we had some pretty confronting results. I think inflation is a lot higher than people expected. But I think generally rates will be on hold for the next few months. The RBA will want further evidence that inflation is growing, and that the economy is picking up.

They’ve said all along that what they’ve wanted to see from interest rate cuts is a handover from the resources boom to the housing sector, which they’re getting. We’re seeing higher home values.

So the likelihood is that rates will stay still for the next few months. But we could see an increase in the interest rate later this year. The RBA are pretty concerned with just how quickly Melbourne and Sydney have been growing over the past year. If home values continue to accelerate, that could move them to increase rates.

At the moment we’re seeing 2.7% annual inflation. If that starts heading up to the higher end of their target band, that would also impact interest rates. And with the Australian dollar dropping, we might start importing inflation from overseas.

Any increase in the interest rate won’t happen til the second half of the year at the absolute earliest – most probably late in the year.

 

Alex Parsons – Chief executive officer of RateCity 
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A CUT IS OFF THE CARDS

I hate to be boring, but there will be no change in February. I think based on the inflationary figures that just came out, coupled with the property market, particularly in Sydney, a cut’s off the cards.

If we do see any movement, it’ll be a rise, but it’s too early for that – that will happen towards the end of the year. But obviously a lot can happen between now and then, in Australia’s economy and internationally.

For now though, the interest rate will stay put. Especially if we see the positivity in the market continue, and now that the dollar’s back in the range they’d like to see. Interest rates are at record lows – the RBA won’t be making any cuts over the next six to eight months.

But overall, consumers shouldn’t worry about RBA changes – they aren’t always passed on by the institutions anyway. Get out there and find out what rate you’re on, and compare it with what else is out there. You can save yourself some money, both on the borrowing side and the lending side.

And if you don’t have a four in front of your home loan interest rate today – get out and get a better one.

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Andrew Wilson – Senior economist, Australian Property Monitors 
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THE IMPROVEMENT TO ECONOMIC ACTIVITY REMAINS A WORK IN PROGRESS

Interest rates settings have been a critical element driving the ongoing revival of Australian housing markets over the past year. Cuts to interest rates in May and August 2013 to the lowest levels in 60 years fuelled home buyer and investor activity with prices growth accelerating in all capital city markets over the second half of the year.

The easing of interest rates over the past two years has been a monetary policy initiative designed to stimulate economic activity in the face of the decline in the construction phase of the mining boom that has underscored economic growth in recent years.

Easier interest rate policy was also designed to reduce the relatively high value of the Australian dollar and increase the competitiveness of Australian goods and services in export markets.

Although lower interest rates are typically a catalyst for house price growth through improved affordability,  this is designed to be offset by an increase in dwelling construction to ameliorate short-term supply-demand imbalances that adds to prices growth – and also to add to economic activity.

The improvement to economic activity through lower interest rates remains very much a work in progress which leaves further scope for another easing in monetary policy through lower interest rates.

Employment in the major states of New South Wales and Victoria continues to deteriorate. Latest ABS data reports that the number of people with jobs in both those states has declined disturbingly over the past year and continues to trend downwards.

Dwelling construction as expected has improved recently although most of the increase in activity has been in planned apartment construction in Sydney and Melbourne which will not add to the stock of housing or economic activity in the short-term. The number of new houses approved remains underwhelming considering the level of stimulus in the market.

The Reserve Bank will likely wait until more data becomes available on the unfolding underlying nature of the economy in 2014 so an interest rate cut is unlikely in February. Although interest rates are likely to remain stable over the short-term the risks remain for another easing in monetary policy particularly if the New South Wales unemployment rate climbs above 6%.

There is certainly no realistic prospect in the foreseeable future of a rise in official interest rates despite the emergence of rising inflation.

news@propertyobserver.com.au

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