Scope for more rate cuts as RBA notes conditions “strengthening in housing market”: May minutes

“Strengthening conditions in the housing market” were noted by RBA board members at the May monetary policy meeting, where the cash rate was cut to a record low of 2.75%.

However, members also noted that, “thus far, credit growth had remained subdued”.

The key phrase in the minutes is that the RBA board decided that “some of the scope” to ease policy should be used at the May meeting, implying that scope still remains for further easing.

“[The board] judged that a further reduction in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target,” read the minutes.

The minutes note improvement in dwelling buying conditions, rising dwelling prices and a pick-up in new dwelling investment.

"Indicators of consumer sentiment were above average levels, with reported buying conditions for dwellings and motor vehicles at relatively high levels," read the minutes.

"Dwelling prices were around 4% above their trough in mid 2012, and auction clearance rates had increased.

"New borrowing for housing had also picked up, while forward-looking indicators and the Bank's business liaison suggested that demand for new housing was improving – notwithstanding a decline in building approvals in the March quarter – with enquiries from prospective purchasers and visits to display homes increasing.

"New dwelling investment had increased since the middle of the previous year, with members observing that approvals for higher-density dwellings had increased, while approvals for detached dwellings had been flat over this period."

Looking ahead, the RBA board expects “moderate growth in dwelling investment” along with growth of resources exports and a pick-up in consumption offsetting “the slowing in overall business investment, given the peak in the mining investment boom along with the effects of fiscal consolidation and the high level of the exchange rate”.

The decision to cut the cash rate was taken despite the household sector responding to low interest rates with overall economic growth “expected to be somewhat below trend for a while” and the inflation outlook “revised down slightly”.

“Increasingly, the household sector had shown signs of responding to these low rates: wealth had been bolstered by higher equity and dwelling prices; measures of consumer confidence were above average; housing and personal loan approvals had been rising, although credit growth remained subdued to date; and dwelling construction activity was growing.

“At the same time, however, conditions in the business sector, as assessed in surveys, generally had remained below average, possibly in part because the exchange rate had remained high despite lower export prices and interest rates,” read the minutes.