Interest rates kept on hold, Cup Day cut also in doubt

Interest rates have been kept on hold, with lingering inflation, a tight labour market and surging property prices forcing the Reserve Bank of Australia’s hand.

The official cash rate will sit at 3.60 per cent until at least the first Tuesday of November, when prospects of a Melbourne Cup Day rate will be in the balance.

The latest inflation data saw Australian consumer prices rose at the fastest annual pace in a year in August, reducing the likelihood of a November interest rate cut to a fifty-fifty call, compared to the 70 per cent chance before those inflation figures were released.

NAB’s reaction to the latest clutch of economic data was to rule out an interest rate cut until May next year, on the back of last week’s higher-than-expected monthly CPI data. 

Before then, NAB expected two further cash rate cuts, the first coming in November, followed by February next year. 

Currently, the three other big four banks still expect the RBA to cut the cash rate in November, however, CBA yesterday acknowledged that it was “by no means guaranteed and will be highly dependent on the data flow from here.”

The RBA’s Monetary Policy Decision released Tuesday (30 September) outlined why it had opted for a cautious approach.

“With signs that private demand is recovering, indications that inflation may be persistent in some areas and labour market conditions overall remaining stable, the Board decided that it was appropriate to maintain the cash rate at its current level at this meeting,” it noted.

“Financial conditions have eased since the beginning of the year and this seems to be having some impact, but it will take some time to see the full effects of earlier cash rate reductions.

“The Board judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve … and remains alert to the heightened level of uncertainty about the outlook.

“It noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia.”

Property market 'frenzy'

The RBA’s statement also made mention of the property market’s robust growth, which comes as the property market in September notched up its fastest pace of monthly capital growth this year.

“In particular, private consumption is picking up as real household incomes rise and measures of financial conditions ease,” the RBA Board noted.

“The housing market is strengthening, a sign that recent interest rate decreases are having an effect (and) credit is readily available to both households and businesses.”

The interest rate decision came a day before the federal government’s expanded Home Guarantee Scheme comes into effect, with first home buyers tipped to create a “frenzy” of demand for more affordable and mid-priced segments of the property market.

REBAA President Melinda Jennison said prices had jumped significantly in many locations over the past month as homebuyers started to panic about the impact of the scheme on the wider market.

“Properties that were selling for $750,000 last month are now selling for close to $800,000,” Ms Jennison said.

“Many buyers are reportedly panicking with some purchasing sight unseen or overpaying to secure a property before 1 October.”

Ms Jennison said while it was admirable the Federal Government was helping more first home buyers into the market by underwriting deposits, without additional housing supply, the end result was already pre-determined.

“What was $800,000 will soon be $900,000, which will make it even more difficult for first timers to secure finance for a home – even with the scheme’s five per cent deposit on offer,” she said.

“Markets are already in frenzy, let alone what the next few months will bring once the scheme has started.

“Property buyers need to calm down, stick to their budgets, and seek out expert advice from professional buyers’ agents to ensure they don’t overpay because of their fear of missing out.”

Job market dictating terms

Various indicators suggest that labour market conditions have been broadly steady in recent months and remain a little tight. Growth in employment has slowed by slightly more than expected, but the unemployment rate was unchanged at 4.2 per cent in August.

“Looking through quarterly volatility, wages growth has eased from its peak, but productivity growth has been weak and growth in unit labour costs remains high,” the RBA noted.

Krishna Bhimavarapu, APAC Economist at State Street Investment Management, said the jobs market was the key determinant of the RBA’s latest rates decision.

“The RBA took a well-earned breather in today’s low-key meeting, following a series of high-stakes decisions.

“Attention remains squarely on the labour market, where hiring momentum has clearly softened—mirroring trends seen in the US, Australia's unemployment rate carries underappreciated upside risks, and any adverse surprises could reignite discussions around potential rate cuts.”

With employment helping prop up the inflation figures, Compare the Market’s Economic Director David Koch commented on the hold decision.

“It’s absolutely no surprise the Reserve Bank kept official interest rates on the hold,” Mr Koch said.

“They'd be spooked by the July and August inflation figures, which came in above expectations, and in fact, we’re at the top end of the Reserve Bank's target range. 

“They'll wait for the September quarter inflation figures to come out before deciding on interest rate movements in their November board meeting.

“If that September quarter inflation figure is higher than expected, well, I reckon all bets are off for a cut in November.”

While interest rates have supported the broad-based rise in housing values, other factors are also at play, especially from the supply side.

Tim Lawless, Research Director at Cotality, said the number of homes for sale in September was hovering around record lows, with total advertised supply down 14.7 per cent on the same time last year and tracking almost 20 per cent below the previous five-year average for this time of the year.

“Below-average levels of available housing supply are a feature of housing conditions across every capital city,” he said.

“At the same time, housing demand remains strong, with preliminary estimates on home sales show volumes tracking 2.7 per cent higher than a year ago and 4.2 per cent above the previous five-year average.

“This disconnect between available supply and demonstrated housing demand is fundamental to understanding the upward trend in housing values.”

Mr Lawless added that the Home Guarantee Scheme, featuring higher price caps and no limits on income or places, is another source of additional housing demand.

“As first home buyers take advantage of the stimulus, we expect to see increased competition for the limited amount of stock in the market, adding to price pressures in the market, especially around the upper limit of the price caps.”