This month’s RBA Board meeting provided no real surprises with interest rates left on hold for the 26th meeting in a row.
The RBA remains reasonably upbeat on the global economy – although it does note some slowing in global trade – and it continues to characterise the Australian economy as “performing well” seeing growth averaging around 3.5% this year and next.
However, while the RBA is right to highlight areas of strength in relation to the Australian economy – notably around an expected improvement in non-mining investment, public investment, resource exports and the unemployment falling to 5% – our view is that its underestimating the threat from tightening credit conditions and the likely drag on consumer spending from falling house prices particularly in Sydney and Melbourne and the threat this in turn poses to wages growth and inflation going forward.
That said, the RBA does now seem to be acknowledging the rising risks around credit “with some lenders having a reduced appetite to lend” and also referring to easing “growth in credit extended to owner occupiers”, but it still seems very relaxed about falling house prices in Sydney and Melbourne.
In contrast to the RBA we see economic growth slowing to around 2.5-3% through 2019 which in turn will result in higher unemployment and keep wages growth and inflation lower for longer than the RBA is allowing.
Our base case is that rates will remain on hold through next year and into late 2020 at least. However, with the risks to growth around tighter credit, falling house prices and the associated drag on consumer spending there is a rising risk that the next move in rates will be a cut. However, that’s a second half 2019 story because the RBA will need to see broader signs of softness to consider cutting interest rates and that will take time. So don’t rely on rate cuts quickly rescuing the property market.
By Shane Oliver
Dec 04, 2018 16:09
Originally published by AMP Capital