Next week the Reserve Bank of Australia will meet for the first time this year to decide on monetary policy. The decision of whether to cut, keep unchanged or increase the official cash rate may set the tone for the year ahead. The RBA will look into both current international and domestic economic conditions as well as analyse financial markets to decide on the cash rate and we are of the opinion that in the present economic environment, a 25 basis point cut is justified.
Moderating housing lending and GDP growth below trend, inflation well within the RBA’s target zone and the aspiration to deflate the Australian dollar, are all signposts to a lower interest rate. The interest rate is one of the determinant factors for the real estate market and we would like to see interest rate lower than they currently are to raise confidence and boost activity on the market.
We are well aware of the booming markets of Sydney and Melbourne, however I’d like to see a pick-up in the activity in those areas where market may not be performing up to their full potential and lower rates would greatly assist with this. It is important that any cut in official interest rate is passed out fully by lenders. With housing affordability being high on the REIA’s agenda we call for a full rate cut being passed on by banks.
Currently 30.4% of the median family income is required to meet average monthly loan repayments. A quarter of a percent rate cut would improve housing affordability. The proportion of the median family income to meet average loan repayments would decline to 29.7% and the median family would pay $50 a month less that they are currently paying. Most importantly, the proportion will drop to below the critical 30% which is usually an indication of housing stress.
A cut in the cash rate will be very important in boosting consumer and business confidence. The latest Westpac-Melbourne Institute Index of Consumer Confidence is below its neutral 100 and is sitting at 93.2. With the mining boom waning it is crucial to boost investment in the non-mining sector of the economy and a further loosening of monetary policy will provide much needed stimulus.
The most recent National Account statistics show annual growth in GDP of 2.7%, below trend, while the outlook for unemployment remains grim. The Government’s Mid-Year Economic and Fiscal Outlook forecasts the unemployment rate will peak at 6.5% in 2014-15 and will stay on this level throughout the year to June 2016.
Just on Wednesday this week, the Australian Bureau of Statistics’ (ABS) inflation figures for the December quarter of 2014 showed the Consumer Price Index increased 1.7% annually. This level is well below the RBA’s target of 2-3% and we believe there is no pressure on the inflation outlook.
Housing finance statistics for November last year show that in trend terms, the number of owner-occupied finance commitments was unchanged. This is the second consecutive month of no change and if refinancing is excluded, in trend terms for November of 2014, the number of owner-occupied finance commitments actually fell by 0.4%. The lending figures indicate a moderating market with November being the tenth consecutive month of modest drops in lending levels if refinancing is excluded. As for property investors, the value of investment housing commitments increased but by a modest 0.9%.
The Reserve Bank needs to move proactively and not leave a cut too late with the gathering economic headwinds Australia and the international community are experiencing.