Rate cut still on the cards

Port Douglas & Mossman Gazette - - FRONT PAGE -

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.

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