Well, it looks like for once we are in the majority.
The RBA has held its first meeting for 2017. As we accurately forecasted — as well as 100% of the economists from the website finder.com.au’s RBA survey (32/32) and 85.94% of the 300 brokers surveyed by online mortgage platform HashChing — the RBA has sat on its hands this month, deciding to leave the official cash rate at 1.5% p.a.
Rate movements, up or down, are a pretty blunt economic instrument. There are a number of challenges in the Australian economy, so the RBA has decided to be prudent and wait for more data before playing its hand.
It’s a bit like a seesaw at the moment.
What Could Cause Rate Cuts?
Inflation is low, sitting at around 1.5% p.a, well below their target band of 2% – 3% p.a. This gives the RBA scope to reduce rates further to try and re-inflate the economy even more.
The AUD is uncomfortably high for the RBA, in large due to the rebounding of commodity prices throughout 2016. This also gives the RBA scope to further cut rates, although any further rate cuts may provide limited stimulus.
The RBA is probably heartened by the US Federal Reserve’s announcement that it will continue with its tightening policy. As US and Australian official interest rates get closer together, you’ll no doubt see a flight of dollars out of the AUD and into the Greenback.
What Is the Case for Rate Hikes?
Well if inflation re-emerges as a significant threat, or GDP exceeds the moderate expectations, the RBA may look to lift rates to dampen the runaway property markets in Sydney, and to a lesser extent Melbourne.
So What’s Our Call for 2017?
Well, based on the current economic data at our disposal, we’d say we’re likely to see rates stay at around 1.5% p.a. for the next few months.
If inflation remains constrained, if GDP remains modest, and if unemployment stays under 6%, then I would expect that we could see rates remain unchanged for even longer.
However, the RBA may have the scope to drop rates down by 0.25% or 0.5% this year. How? This would only happen under the following conditions:
- The rebound in commodities continues into 2017 like it finished 2016
- The AUD tracks upwards of US $0.80
- APRA enforces tougher lending conditions on investors (and/or the banks lift rates out of cycle)
Interestingly, the Australian Financial Review reported today that Bankwest, a subsidiary of the CBA, will no longer accept applications from new customers “seeking to refinance their standalone investment lending from other financial institutions”.
The bank has also made it tougher for existing customers by slugging them with an out-of-cycle interest rate rise of up to 60 basis points for investment loans. They’ve also tightened terms and conditions for expatriate and overseas customers.
Although no official explanation was given behind the reasons for such a move, it’s likely the result of Bankwest approaching (or exceeding) the 10% p.a. growth rate for investor lending imposed by APRA.
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