Mort­gage hold­ers to breathe easy



In­ter­est rates are likely to stay un­changed through­out next year, with the Re­serve Bank pre­dict­ing that in­fla­tion will re­main be­low the bot­tom of its 2 to 3 per cent tar­get band un­til early 2019.

The bank’s quar­terly re­view of the eco­nomic out­look shows it is ex­pect­ing a big im­prove­ment in Aus­tralia’s eco­nomic growth, fore­cast­ing that it will lift from a sub­dued rate of only 2.25 per cent this year to an av­er­age 3 per cent next year, lift­ing fur­ther to 3.25 per cent by mid-2019. The bet­ter growth will bring a grad­ual fall in the un­em­ploy­ment rate, but it will not be fast enough to gen­er­ate higher wages or in­fla­tion.

“GDP growth should strengthen over the rest of the fore­cast pe­riod as the drag from min­ing in­vest­ment comes to an end and pub­lic de­mand and non-min­ing busi­ness in­vest­ment con­tinue to sup­port growth” the re­view says.

The Re­serve Bank has cut its fore­cast for in­fla­tion to 1.75 per cent for the re­main­der of this year and next year, re­flect­ing the im­pact of a re­cal­cu­la­tion of the in­fla­tion fig­ures by the Aus­tralian Bureau of Sta­tis­tics to al­low for chang­ing con­sump­tion pat­terns.

Although this was a tech­ni­cal change, mar­ket an­a­lysts said it was un­likely that the Re­serve Bank would lift in­ter­est rates unless in­fla­tion had at least reached the bot­tom of its tar­get band.

West­pac chief econ­o­mist Bill Evans said that while gov­er­nor Philip Lowe would con­tinue to in­di­cate that the next move in rates would be an in­crease, he be­lieved “the rhetoric around a long pe­riod of steady rates will gain fur­ther em­pha­sis”.

The Re­serve Bank’s ma­jor con­cern over the eco­nomic out­look is house­hold spend­ing. Its cen­tral view is that con­sump­tion will im­prove grad­u­ally while re­main­ing be­low the growth rates seen be­fore the fi­nan­cial cri­sis.

The Re­serve Bank says more firms have been re­port­ing difficulty in find­ing suit­able labour and that might lead to a faster im­prove­ment in wage growth. How­ever, it noted that weak wage growth was a global prob­lem, re­lated to fac­tors such as tech­no­log­i­cal change and glob­al­i­sa­tion which were un­likely to change soon.

House­hold con­sump­tion is also con­strained by the level of debt. “A highly in­debted house­hold sec­tor is likely to be more sen­si­tive to changes in in­come or wealth, which could have im­pli­ca­tions for con­sump­tion growth.”

The Re­serve Bank is more con­fi­dent about the out­look for busi­ness in­vest­ment, which it says is “more pos­i­tive than it has been for some time”.

Re­cent re­vi­sions to na­tional ac­counts show non-min­ing busi­ness in­vest­ment is ris­ing more strongly than pre­vi­ously thought and is now 10 per cent higher than at the be­gin­ning of last year. It says the growth in in­vest­ment is sup­ported both by low in­ter­est rates and the pre­dicted lift in GDP growth.

The Re­serve Bank also ex­pects fur­ther im­prove­ment in em­ploy­ment. It takes some credit for the strength of the labour mar­ket over the past year, say­ing the stim­u­la­tory level of in­ter­est rates had “helped gen­er­ate a de­cline in un­em­ploy­ment”, which has come down from 5.9 per cent to 5.5 per cent over this year.

The Re­serve Bank pre­dicts a grad­ual fur­ther im­prove­ment in un­em­ploy­ment to 5.25 per cent by the end of next year.

Aus­tralia’s cen­tral bank has sig­nalled that in­ter­est rates could re­main lower for longer, as it bal­ances low in­fla­tion, weak re­tail spend­ing and a debt binge caused by the hous­ing boom it fos­tered by cut­ting rates to a record low as min­ing in­vest­ment plunged af­ter a decade-long boom.

The Re­serve Bank’s quar­terly State­ment on Mon­e­tary Pol­icy yes­ter­day pre­dicted core in­fla­tion would stay be­low the cen­tral bank’s 2-3 per cent tar­get next year and would not ex­ceed the bot­tom of the range in 2019.

While cen­tral banks around the world have kicked off a round of in­ter­est rate in­creases, the RBA has held steady on its mon­e­tary pol­icy set­tings for the past 14 months, although Aus­tralia did not cut of­fi­cial rates as deep dur­ing the down­turn that fol­lowed the global fi­nan­cial cri­sis.

In Au­gust, the RBA said core in­fla­tion would reach a mid-point of 2 per cent in 2017 and 2.5 per cent by mid-2019, fu­elling spec­u­la­tion that a round of in­ter­est rate rises could be­gin in late 2018.

Eco­nomic growth is still ex­pected to reach an “above-po­ten­tial” rate of 3.25 per cent next year and un­em­ploy­ment is ex­pected to stay at 5.5 per cent be­fore falling to 5.25 per cent in late 2019, the RBA said in its out­look yes­ter­day.

The dol­lar re­acted neg­a­tively but stayed above its re­cent low of US76.25c as traders con­tin­ued to see a good chance of an of­fi­cial rate rise late next year.

But West­pac chief econ­o­mist Bill Evans said the lower in­fla­tion fore­casts from the RBA had “sig­nif­i­cant pol­icy im­pli­ca­tions”, re­in­forc­ing his ex­pec­ta­tion that rates will not rise for two years.

“We are now as­sess­ing a cen­tral bank that is ex­pect­ing it will un­der­shoot its head­line in­fla­tion tar­get for an­other year, and that even one year out, in­fla­tion will still be at the bot­tom of the tar­get zone,” Mr Evans said.

“It has long been our view that with the con­fi­dent growth fore­casts of 0.5 per cent above po­ten­tial growth in 2018 and 0.75 per cent above po­ten­tial in 2019, and in­fla­tion mov­ing back to the mid­dle of the tar­get zone in 2019, that the bank ex­pected to be rais­ing rates in 2018. These fore­casts no longer por­tray a cen­tral bank that ex­pects to raise rates.”

The RBA has kept the of­fi­cial cash rate at a record low of 1.5 per cent since Au­gust last year.

UBS econ­o­mist George Thare­nou said a reweight­ing of the con­sumer price in­dex to re­flect

chang­ing spend­ing pat­terns sub­tracted more from the in­fla­tion fore­casts than ex­pected, but the slash­ing of the 2019 fore­cast for core in­fla­tion by 0.5 per cent was a “dovish sig­nal”

“You can also for­get about near-term rate hikes,” Mr Thare­nou said. Still, he con­tin­ued to pre­dict that the RBA would be in a po­si­tion to lift rates by the end of next year.

With early signs of a cool­ing hous­ing mar­ket, this has eased pres­sure for an in­crease.

The RBA noted that hous­ing credit growth “has eased a lit­tle”, helped by re­stric­tions on bank lend­ing while the pro­file of new lend­ing has shifted away from in­ter­est-only and other high-risk loans. How­ever, it noted a po­ten­tial stress point in the econ­omy of high house­hold debt that “con­tin­ues to in­crease faster than house­hold in­come”.

In its state­ment yes­ter­day, the RBA said the econ­omy was ex­pected to “ex­pand at a solid pace” over the next cou­ple of years, and labour mar­ket de­vel­op­ments had been “quite pos­i­tive of late”.

“The drag on growth from the end of the min­ing in­vest­ment boom has eased and is likely to end some time in the next year or so,” the RBA said. “In­vest­ment in the non-min­ing sec­tor has been in­creas­ing but growth in con­sump­tion has been be­low av­er­age. In­fla­tion and wage growth re­main low. Both are ex­pected to rise only grad­u­ally.”

The RBA added that growth in house­hold con­sump­tion looks to have slowed in the Septem­ber quar­ter given re­cent weak­ness in re­tail spend­ing. Con­sump­tion growth is ex­pected to pick up grad­u­ally, but slow growth in in­comes and high lev­els of debt are con­strain­ing fac­tors, it said.

Slow growth in house­hold in­come has been driven pri­mar­ily by un­usu­ally soft out­comes for av­er­age em­ployee earn­ings as mea­sured in the na­tional ac­counts, which has more than off­set the ef­fects of strong em­ploy­ment growth. Wage growth has stayed near record lows near 2 per cent in re­cent quar­ters.

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