Is the RBA really slashing rates next week?

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Most industry experts are anticipating a cash rate cut next week, but a scenario wherein the Reserve Bank of Australia (RBA) waits for another month to do so would not be surprising, according to CoreLogic Research Analyst Cameron Kusher.

“While I (and the interest rate futures market and the overwhelming majority of economic commentators) believe that [a slash on rates] is still the most likely outcome [of the next monetary policy meeting], I can see a scenario whereby the RBA once again keeps rates on hold,” he said.

Over recent weeks, there have been several changes that have been positive for the housing market.

First, there was no change of government at the federal election. Labor’s proposed changes on negative gearing and the capital gains tax brought uncertainty into the industry— and with the  Coalition winning in the recent national polls, a level of confidence seemed to be returning to the market.

“Dwelling value declines were already slowing, but now lenders are reporting much higher levels of mortgage demand and auction clearance rates last week lifted to their highest level nationally since mid-May last year, and in Sydney, they increased to their highest level since April last year,” Kusher said.

Second, the Australian Prudential Regulation Authority announced that it is planning to alter serviceability calculations on new mortgages. While there is a consultation period of four weeks, it is likely that these changes will proceed, according to Kusher. Once implemented, easier access to mortgages might boost market activity and help to provide a floor under housing prices.

Third, the RBA hinted that interest rates would be reduced. RBA Governor Philip Lowe recently dropped his biggest clue yet that rates will be slashed in June.

“Interest rate cuts put more cash in mortgage holders’ pockets. If someone is struggling to repay their mortgage, they can contact their banks and ask for a reduction in repayments (assuming lenders pass on a cut which is highly likely) and for those that choose not to reduce their repayments, they end up paying back more of the loan principal thereby paying down debt quicker. Furthermore, a lower cash rate typically means lower interest rates on savings accounts, thereby reducing the incentive to save and increasing the incentive to spend,” said Kusher.

Housing is the largest single asset class in the country, according to Kusher. With things looking up for the sector, the need for lower rates becomes a question. However, he said that the cut is not specifically about housing.  Instead, it is related to economic growth and inflation.

Headline inflation was steady over the March quarter and just 1.3% higher over the year. The RBA’s preferred measure of underlying inflation is drifting further away from the 2% to 3% target range.

Underlying inflation has been sitting below the target range since December 2015 and has not reached the midpoint (2.5%) since September 2014.

Gross Domestic Product (GDP) or economic growth, meanwhile, was recorded as 0.2% over the December quarter— its lowest growth rate since September 2016.

 On an annual basis, GDP rose 2.3%, making it the slowest rate of growth since June 2017.

“So we have low inflation and sluggish economic growth, which has been the case for some time, but both have weakened further in their recent releases. The RBA has repeatedly stated the main reason for not cutting interest rates is the strength of the labour market. However, it has now also weakened,” Kusher said.

On a seasonally adjusted basis, the unemployment rate rose to 5.2% in April 2019. The figure is the highest unemployment rate since August 2018.

Although the unemployment rate has increased, annual jobs growth climbed to 2.6%, its fastest growth rate since June 2018.  The participation rate was at 65.8%, the highest it’s been since January 2018.

“So while the unemployment rate has weakened, more people are in work or looking for work, and job creation has accelerated. We should note that unemployment is typically a lagging indicator and measures of job advertisements are showing slowdown over recent months,” Kusher said.

Kusher still believes that an interest rate cut on June 4 is the most likely scenario, but it would not be a shock if the RBA is tempted to wait another month

“Waiting another month will allow the RBA to gather evidence as to whether the housing market is truly improving and it will afford them the luxury of seeing the March quarter GDP figures which are released the day after their board meeting (June 5),” he said.

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