Rate cut still on the cards
WESTPAC’S economists’ think there will be another rate cut in 2014.
Having alaysed the Reserve Bank Board’s statement on Tuesday, after the board’s decision to keep interest rates on hold at 2.50 per cent, Westpac’s brain trust are sticking to their bearish view of rate cuts for next year.
‘‘The statement which the Governor has released appears to be tactical,’ the Westpac team said. ‘‘There is no doubt that the Bank remains concerned about the level of the Australian dollar. There were few differences in the phrasing in this statement relative to the October statement but the one that stood out was reference to the Australian dollar being ‘still uncomfortably high’.
‘‘ The sentiment from October was also strengthened. In October a lower level of the currency was described as ‘would assist in rebalancing growth’ whereas this time it is referred to as ‘likely to be needed to achieve balanced growth’.
Westpac noted that a second additional commentary in this statement was around the outlook for private demand growth. The RBA expects demand ‘‘to increase at a faster pace’’ but provides a major qualification ‘‘though considerable uncertainty surrounds this outlook’’.
The RBA also noted that despite the reported fall in the unemployment rate in September, due to movement in the participation rate, ‘‘the unemployment rate has edged higher’’; ‘‘inflation is likely to remain consistent with the target for the next one to two years’’; there is recognition of the rise in housing and equity markets but the emphasis is around the likely support to investment rather than any implication of excess; for the first time in recent statements the Governor is pointing out the potential drag on growth from public spending.
Westpac’s team sees the governor’s statement as tactical, designed to add some downward pressure to the Australian dollar while providing a balanced assessment of the risks for the economy in 2014.
Markets have moved to price out any possibility of lower rates in the first half of 2014 and confidently expect a rate hike by the end of 2014.
But, ‘‘we continue to see the case for further easing of rates sparked by a persistently high AUD (we do not expect tapering in 2014). While we recognise that the recent boost to confidence is encouraging, time will be required to assess whether this materialises in a boost to investment, employment and spending decisions. Historical evidence, when election results boost confidence, is not convincing.
‘‘We see nothing in this statement to dissuade us from our view that rates will go lower in the first half of 2014,’’ Westpac said.
Meanwhile, Westpac’s most senior econom- ist, Bill Evans, has commented on the RBA’s recent remarks on the state of the housing market.
‘‘We are firmly in the [RBA] governor’s camp with respect to concerns around housing ‘bubbles’. Australia’s housing sector is showing clear signs of a pick-up although the response to lower interest rates has been slower and more muted than in previous easing cycles, Mr Evans said. ‘‘The value of loan approvals is up 17 per cent year, led by strengthening investor and ‘upgrader’ demand but offset by weak first home buyer activity, where approvals have actually fallen by around 20 per cent. The total number of approvals is still well below previous peaks.’’
By state, activity has been stronger in NSW, with conditions more mixed in WA, Victoria, Queensland and SA.
This diverse performance is best illustrated by the changes in the six month annualised price increases across the country.
‘‘Our measures of the composite of various house price series show that relative to three months ago the momentum has slowed in some cities and exploded in Sydney. Sydney prices are up by 14.7 per cent (six month annualised) compared to 8.2 per cent in July.
‘‘That compares with Melbourne (4.5 per cent vs 5.1 per cent in July); Perth (6.8 vs 10.5 per cent); Brisbane (1.7 vs 1.2 per cent); and Adelaide (0.2 vs 2.4 per cent).’’
‘‘It should be noted that these gains have only just seen prices nationally return to their 2010 peaks. Average income has risen 10 per cent since then. The recent strength in Sydney also follows Sydney’s protracted underperformance relative to the rest of Australia over the last 10 years (Sydney prices up by 40 per cent compared to around 90 per cent in Melbourne; Brisbane; Adelaide; and 150 per cent in Perth).
Mr Evans said Westpac expects Australia’s housing recovery to continue to be a ‘‘stopstart’’ and uneven one.
‘‘There are headwinds that are yet to fully impact with some markets facing increases in new dwelling supply (Vic, WA) and the mining downturn to play through fully to housing (WA, Qld).
‘‘More generally, we expect Australian households to continue to exercise balance sheet restraint, with a reluctance to increase debt relative to incomes limiting price growth. We also expect households to remain cautious around job security which will impact, in particular, first home buyers and upgraders.’’
On November 8 the bank will release its statement on monetary policy.
Growth is not expected to return to trend until the second half of calendar 2014 with a forecast of 2.5 per cent to 3.5 per cent for the year to December.