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RBA keeps cash rate at 1.5pc

The Reserve Bank of Australia has kept the official cash rate steady for a 10th straight meeting and signalled it won’t be in any rush to join offshore banks in moving towards near-term interest rate hikes.

Board members left the overnight cash rate at 1.5 per cent, where it’s been since last August, as was forecast by markets.

In recent months, Australia’s big four banks, along with a number of smaller lending institutions, have regularly raised rates, particularly for interest-only borrowers, effectively tightening monetary policy despite the central bank’s caution. Household debt, new figures show, is at a record high.

Treasurer Scott Morrison said on Monday that he was confident this year’s APRA crackdown on interest-only loans to property investors would ensure a “safe landing” by encouraging households to reduce their overall debt levels.

The dollar fell sharply after the board’s statement was published after it dashed expectations among some traders that they would join the Bank of England and Bank of Canada’s recent shift towards a more hawkish stance.

Instead, the Reserve Bank produced a near carbon copy of the June statement, noting that consumption remains “subdued” because of low wages growth and high levels of household debt.

The bank also noted that global inflation rates have decline recently in response to falling oil prices, and that wage growth was subdued in “most countries, as does core inflation”.

On the more optimistic front, the Reserve Bank said that it expects the economy to “strengthen gradually” and repeated that a rising Australian dollar wouldn’t be helpfull.

The wait-and-see tone of the statement saw the exchange rate fall to US76.32¢ from US76.77¢.

In a repeat of the June statement, the Reserve Bank noted that the housing market varies around the country, but that the stronger markets are showing signs of easing.

“Growth in housing debt has outpaced the slow growth in household incomes,” it reiterated.

“The recent supervisory measures should help address the risks associated with high and rising levels of household indebtedness. Lenders have also announced increases in mortgage rates for investor and interest-only loans.”

source http://www.afr.com/news/economy/monetary-policy/rba-keeps-cash-rate-at-15pc-20170704-gx4afm

1498629490828

RBA could raise rates eight times in next two years, ex-board member says

The Reserve Bank could increase interest rates eight times in the next two years, former board member John Edwards said.

The RBA is probably already considering a program of rate increases given its forecasts for inflation returning to target and economic growth to accelerate to 3 per cent against a stronger global backdrop, Edwards said in a column on the website of the Lowy Institute for International Policy, where he is a non-resident fellow.

Theorising that the long-term cash rate is about 3.5 per cent — lower than the 5.2 per cent average over the past two decades — and the RBA wants to start tightening in 2018 and reach its goal within two years, that would require four quarter-point increases each year, he said. Rates have been on hold at 1.5 per cent since last August.

“It seems to me that something like eight quarter percentage point tightenings over 2018 and 2019 are distinctly possible, if the RBA’s economic forecasts prove correct,” said Edwards, who was on the bank’s board until July last year.

“It’s possible the tightening could start earlier, or if not the tightening itself, at least the signaling which should precede it. We may be seeing a little of that now.”

Small steps

The RBA traditionally makes small steps and typically doesn’t commit itself to subsequent moves, making the market wary of predicting where the bank will be in a few years, Edwards said. In the current circumstances, he said we can reasonably assume:

  • the RBA considers its current rate to be exceptionally low
  • if the economy improves as it predicts, the next move will be up
  • if the economy was operating, as the RBA predicts, at 3 per cent output growth and 2.5 per cent inflation, it would think of a sustainable or natural policy rate of at least 3.5 per cent
  • most importantly, it will want the policy rate increase to match the forecast improvement in Australia’s economic performance, so rising to at least 3.5 per cent by the end of 2019.

Edwards noted the risks of rate increases alongside high household debt, with most home loans on variable interest rates closely tied to the RBA’s cash rate.

“The bigger the household debt, the more impact a quarter percentage point increase in the policy rate will have on household spending,” he said. “In the Australian case, it is certainly possible that high household home mortgage debt will crimp consumer spending if the policy rate returned to what was once considered a relatively low long-term rate.”

Still, Edwards noted that interest paid on home loans is much less than it was six years ago: while debt has increased, interest rates have fallen a lot. Payments are now 7 per cent of disposable income compared with 9.5 per cent in 2011, and 11 per cent at the peak of the RBA tightening cycle before the 2008 financial crisis, he said.

Moreover, if the standard variable mortgage rate peaked at around 7 per cent, that would still be nearly one percentage point below the 2011 level, and two-and-a-half percentage points below the 2008 peak, he said.

“The pace of tightening will anyway be governed by the strength of the economy,” Edwards said.

“If household spending weakness, if the long expected firming of non-mining business investment is further delayed, if the Australian dollar strengthens, if employment growth is persistently weak, then the trajectory of rate rises will be less steep and the pace less rapid.”

Bloomberg

Source: http://www.smh.com.au/business/the-economy/rba-could-raise-rates-eight-times-in-next-two-years-exboard-member-says-20170628-gx0cin.html

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