How the industry reacted to the RBA decision

Yesterday’s RBA decision to leave the cash rate on hold has received positive market responses.

A range of financial groups believe current positive economic data correctly encouraged the bank to hold its ground at 2.5%, with no rush for further cuts until possibly early in the new year.

Mortgage Choice spokesperson Jessica Darnbrough said rising consumer sentiment, improving business confidence and climbing dwelling values, showed there was no urgent need to cut rates this month.

“Consumer sentiment and business confidence have both seen a dramatic improvement over the past month, hitting levels not seen in recent times. According to the Westpac-Melbourne Institute Index of Consumer Sentiment, confidence rose 4.7% in September to be 13.8% higher than when the Reserve Bank first cut the cash rate in November 2011.

“Similarly, the NAB Monthly Business Survey found business confidence strengthened considerably in August, rising to its highest level since May 2011.

“In addition, capital city dwelling values recorded a modest 0.5% increase in August, taking the cumulative recovery in residential values to 7.0% since the market bottomed out in May last year.”

The ANZ Bank says the RBA’s ‘steady as she goes’ approach remains appropriate. ‘’Their text was almost identical to that released after the August and September board meetings,’’ chief economist Ivan Colhoun said.

‘’Importantly, there was no upgrade to the bank’s easing bias, which suggests a reduced likelihood of any further reduction in interest rates before Christmas.’’

The ANZ has pushed its forecast for the final cut in this interest rate easing cycle out to February 2014, but assesses that we are close to the bottom of this cycle.

‘’A number of elements in the RBA’s statement suggest it remains comfortably on hold in the near-term:

* There has been an improvement in indicators of household and business sentiment recently, though it is too soon to judge how persistent this will be (the implication: wait and see);

* The easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through and will be for a while yet.

* There is continuing evidence of a shift in savers’ behaviour in response to declining returns on low-risk assets. The implication here is that monetary policy is working. The growth outlook would need to change substantially to require a further move in rates in the near-term.

Mr Colhoun said after easing in August, the RBA reverted to standard phrases “the setting of monetary policy remained appropriate” and “the Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target”.

He said these phrases have often been used when policy is seen to be correct and no near-term adjustment is considered likely. These statements were repeated this month.

The minutes to these board meetings provided some further information: “Given the substantial degree of policy stimulus in place, the Board judged that it was appropriate to retain the current setting of interest rates. Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them. The board would continue to examine the data over the months ahead to assess whether monetary policy is appropriately configured.” This paragraph indicates a mild but relatively inactive easing bias in the near-term.

Mr Colhoun said phrases that have typically been used to suggest the possibility of a near-term move in rates in recent times have included reference to “scope to ease” and “policy remains appropriate for the time being”. The absence of these phrases today suggests the minutes to this meeting will again report no move on rates is likely in November.

‘’By inference, given the November meeting contains additional information on the CPI and the Bank’s new GDP forecasts, there’s a reduced likelihood for a cut at the December meeting. This suggests no further cut in interest rates is likely before the February board meeting, at the earliest, and an increased likelihood that we may already be at the low in the cycle.’’

The ANZ continues to keep a February interest rate cut in its profile, believing that a higher jobless rate and weaker mining investment keep open the option that the RBA takes out some further insurance, although Mr Colhoun says it’s preferable the AUD falls further instead.

‘’The bank believes we are close to the low in the cash rate cycle, given the improving housing sector, better global growth news and accommodative monetary policy. The wind back in mining investment, however, is expected to see interest rates remain at a relatively low level throughout 2014.’’

The CEO of the Real Estate Institute of Australia, Amanda Lynch, has welcomed retention of the low cash rate. “The board has made a considered and accurate assessment of the property market, and we are pleased media speculation about a housing bubble has been dampened.”

Ms Lynch said official rates had been slashed by a total of 2.25 percentage points since this cutting cycle began in November 2011. “As a result of the easing monetary policy, housing affordability is now at its lowest level in a decade. Nationally, it now takes 28.7% of the median family income to meet average loan repayments.”

In its September 2013 Financial Stability Review, the Reserve Bank warned home buyers to maintain realistic expectations of future dwelling price growth, Ms Lynch said. The bank associated an increase in property market activity over the past year, particularly in NSW and from investors, with the recent increases in housing prices.

“Some markets are performing well but this growth is not, by any means, Australia-wide,” she said.

“We believe that maintaining the banks’ high lending standards is crucial to continued sustainable growth in the Australian housing market.

“Rates, however, need to stay low to provide much needed confidence to first home buyers and increase building activity.”

Leading financial comparison website RateCity says the current low interest rates are likely to remain.

CEO Alex Parsons said variable rate borrowers with a typical $300,000 home loan would be around $600 better off by the end of the year, based on the previous two rate cuts in May and August 2013.

“Since January we’ve seen the cash rate slashed by 0.50 percentage points, with the mid-year cuts representing big savings for some variable borrowers,” he said.

“Compared with this time last year, variable rate borrowers are paying $171 less per month on average to service the same $300,000 home loan.”

But Mr Parsons said the RBA’s decision to keep rates on hold would continue poor returns for savers. He urged them to ‘’shop around’’ and compare rates.

“While many savings accounts offer rates around the 3% mark, it is possible to find higher interest savers paying a maximum rate of up to 4.77%, so it’s vital they shop around to ensure they are maximising their profit margin.”