As expected, the Reserve Bank of Australia left its benchmark rate unchanged at 2%. “The RBA probably doesn’t need to worry too much about over stimulating the housing market via another rate cut; mortgage rates are already higher than a year ago due to the higher capital requirements implemented by APRA and the pace of investment growth has fallen below APRA’s 10% speed limit imposed in December 2014”.
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He said the board would monitor whether the recent improvement in the workforce would continue.
The domestic economy appears to be heading in the right direction, as the transition continues away from the mining sector.
LJ Hooker chief executive Grant Harrod said buyers were becoming more confident and the volatility of the stock market was bringing investors back to real estate.
If nothing transpires from this event, the market will wait for the RBA’s quarterly monetary policy statement on Friday. Investors are now pricing in a 36 per cent probability of a further cut in interest rates by April, with the bets on a rate cut by July rising to 76 per cent.
Economic fundamentals remain mixed; the monthly unemployment rate is unchanged at 5.8%, but employment has barely budged, although there has been an increase in full-time employment accompanied by an offsetting decrease in part-time employment.
The Australian dollar rose slightly ahead of the first board meeting by the RBA for 2016 with the dollar trading at 70.95 USA cents at 12.05pm (AEDT), up from 70.77 cents on Monday.
After its policy meeting Tuesday it said “there were reasonable prospects for continued growth in the economy, with inflation close to target”. Thereafter, the bigger focus is the degree to which markets are going to return to the trends seen earlier in the year (e.g. weakness in oil, strength in ye, weakness in commodity currencies and sterling).
The Board specifically noted that coming data would allow it to better judge if turmoil in financial markets truly augured tougher times for the global economy, and whether recent strength in employment at home would prove long lasting.
The RBA stated that it will be closely watching “labour market conditions” and the economic impact of “recent financial turbulence”, which could generate more market interest in the January employment report scheduled for release on 18 February.
The December quarter CPI figures show that the RBA’s preferred measures of underlying inflation just scraped in at the bottom of the bank’s two to three per cent target band. The confidence that a rate cut is appropriate has dropped for the second time in a row and now equals 17% (22% in December); the confidence that a rate increase, to 2.25% or higher, is necessary has risen to 14% (11% in December).
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However, with inflation low and expected to stay low, the RBA has scope to cut if demand weakens.
