RBA To Monitor Property Prices

Australia’s central bank debated whether to cut interest rates at its February policy meeting or wait until March, before choosing the earlier date which had the option of communicating its reasons in a quarterly policy statement just days after.

“In deciding the timing of such a change, members assessed arguments for acting at this meeting or at the following meeting,” the Reserve Bank of Australia said in minutes from the meeting.

“On balance, they judged that moving at this meeting, which offered the opportunity of early additional communication in the forthcoming Statement on Monetary Policy, was the preferred course,” it added.

The RBA cut interest rates by one quarter of a percentage point at the start of the month to a record low 2.25%, its first cut since August 2013, citing falling global interest rates, weak domestic growth and the risk of rising unemployment.

The RBA also said it will be watching property prices in the wake February’s record-low official rate. “Given the large increases in housing prices in some cities and ongoing strength in lending to investors in housing assets, members also agreed that developments in the housing market would bear careful monitoring,” the minutes said.

“Housing price inflation had moderated from the rapid rates seen in late 2013, but remained high and in Sydney and Melbourne had been well above the growth rate of household income,” the RBA said.

The RBA said growth of investor credit had continued to increase “at a noticeably faster rate” than owner-occupier housing credit, while a range of indicators suggested further growth of dwelling investment in the near term, the bank said.

The RBA said it would keep a close eye on the impact of moves late last year by the Australian Prudential Regulation Authority, designed to temper investor activity.

In board member’s discussion of the economic outlook, they noted that forecasts for output, which were conditioned on an assumption of no change in the cash rate, had been revised lower in the near term, and that non-mining business investment was likely to occur “later than had previously been anticipated”.

“The revisions to GDP growth implied that the unemployment rate would peak at a higher rate and later than had been previously forecast, before declining gradually,” the minutes said.

GDP growth itself would remain below trend over the course of this year, before gradually picking up to an above-trend pace in 2016, the minutes said, somewhat later than had been previously expected.

There was no indication of whether the RBA will follow up February’s rate move with another cut in March.

Many in the financial markets were not expecting the cut in as RBA Governor Glenn Stevens had indicated as recently as December that interest rates stability remained an attractive option.

Financial markets are now betting the RBA will cut interest rates at least one more time by mid-2015, with some market participants expecting it will continue cutting in the second half of the year.

A high Australian dollar had added to the woes of the economy, albeit it has now fall by close to 30% since its historic peaks above parity in 2011.

The Australian dollar has fallen a long way against the U.S dollar, but not so against other major currencies.

“A lower exchange rate was likely to be needed to achieve balanced growth in the economy,” the minutes said.

Stevens told parliament Friday the economy was in need of more growth, with employment data the day prior showing a jump in unemployment to its highest level in around twelve and half years.

This news story is reprinted from www.businessspectator.com.au

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