In its second announcement of the year, the Reserve Bank of Australia (RBA) has announced that the official cash rate will remain on hold at 1.5%
In a statement the RBA said the central scenario is still for the Australian economy to grow “by around 3% this year”.
Speculation around the decision has intensified over recent weeks due to emerging trends across the lending environment, including out of cycle rate increases from the banks, the correction in the property market and rising arrears.
Mortgages more than 90 days in arrears climbed to a record 0.75% in December, according to S&P Global Ratings. While five years ago only 39% of prime mortgage arrears were more than 90 days overdue, the figure has since risen to 55%, with the largest hike witnessed in the Northern Territory.
According to CoreLogic, a sharp slowdown in residential construction activity – coupled with low retail trade – indicates that weak property market conditions are already spilling over to the broader economy.
As such, it believes there is a “growing possibility” that rates could fall later this year.
“The performance of the housing sector over coming months should provide some clues about future monetary policy decisions,” said CoreLogic head of research Tim Lawless.
“A further deterioration in the pace or geographic scope of declines could tip the balance in favour of a rate cut later this year as the RBA becomes wary of the wealth effect moving into reverse,” he added.
Last week the shadow RBA board advised the rate should remain on hold, as it has since August 2016. According to a media release, its advice is based on the national economy “currently not showing any clear direction”.
However, in its six month forecast the shadow board has revised down the likelihood of a change in rate from 60% to 46%.
Chair of the RBA Shadow Board Dr Timo Henckel said while real wages growth has ticked up marginally, consumer and business indicators paint a mixed picture, and the housing market has extended its slump.
“The board is 62% confident that keeping interest rates on hold is the appropriate policy, up six percentage points from February,” Dr Henckel said.
“It attaches a 35% probability, compared to 41% probability last month, that a rate rise, to 1.75% or higher, is appropriate - and an unchanged 3% probability that a rate cut is appropriate,” he added.
The shadow board cited a number of domestic and international factors in its calculations. The Australian dollar is now trading higher at US$0.71 to US$0.72 and the ASX has extended its recent gains, with the S&P/ASX 200 stock index approaching the 6,200 mark.
Yet despite a rally in January, the IMF and OECD have revised down their global economic outlooks for the year.
“The risks to the global economy remain much the same,” Dr Henckel said.
“America’s fiscal boost from the Trump administration’s tax cuts will likely wane; Europe’s economies, including Germany’s, are weakening; emerging markets, especially the highly leveraged ones, are susceptible to the shifts in sentiment in financial markets. Furthermore, political instability and geo-strategic tensions do not seem to be abating any time soon.”
