Low inflation and housing market softening could all be justifications for the central bank to drop rates further

Head of investment strategy and chief economist at AMP Capital Shane Oliver has noted that despite strength in some economic indicators, factors such as low inflation, stunted wage growth, consumer uncertainty and the high exchange rate are likely to prompt the RBA to hold the cash rate.

“While confidence, jobs and non-mining investment are strong, inflation remains below target, wages growth remains around a record low, uncertainty is high regarding the outlook for consumer spending and the Australian dollar is too strong. As such, it is too early for the RBA to consider raising interest rates,” Mr Oliver said.

Independent property market economist Dr Andrew Wilson agrees and also believes that a reduction in housing market activity will further influence the central bank’s decision to keep the cash rate unchanged.

“The latest data is too benign for rate movement — low inflation, higher dollar, cooling house prices, positive labour market, declining building approvals, lower home investor activity — a mixed bag means wait and watch early days 2018 for [the] RBA,” Mr Wilson said.

Despite predicting a hold decision, managing director of Market Economics Stephen Koukoulas suggested there’s evidence that a rate cut is required.

“[The] RBA continue[s] to miss its inflation target, and despite evidence that a rate cut is needed, it is likely to remain on hold. It will cite an improving global economy as a key reason,” Mr Koukoulas said.

Moreover, professor at Monash University Mark Crosby expects the RBA’s eventual decision to raise the cash rate to be influenced by movements in the global market.

“2018 will be watch and wait for the RBA as they observe movements in overseas rates and ponder timing for a rate rise in Australia,” Mr Crosby said.

A leading economist has cited concerns over “extremely high” household debt and a potential rise in mortgage defaults as justification for a cash rate reduction.

Despite an apparent consensus among industry leaders that the Reserve Bank of Australia’s (RBA) next cash rate move will be an increase, managing director of Market Economics Stephen Koukoulas has claimed that a further reduction in the record low cash rate would be a welcome move for the economy.

Mr Koukoulas has predicted that the RBA will hold the cash rate at 1.50 per cent, but he has noted that high household debt, low inflation and housing market softening could all be justifications for the central bank to drop rates further.

“For more than two years now, inflation’s been below the bottom of their target range. So, I think they need to ensure monetary policy is set towards reflating the economy, getting inflation a little bit higher,” the managing director said.

“You then throw in a few issues like the softness in housing, which has been something of as concern.

“If the house prices in Sydney and Melbourne keep falling, there’s a potential risk to the economy there.”

“Trifecta of bad news”

Mr Koukoulos also noted the risks that a cash rate hike could have on Australians with “extremely high” household debt, warning that more borrowers could be at risk of defaulting on their mortgages.

“[Households] are very vulnerable to higher rates because of the extremely high level of household debt, so that’s one of the things that I think I’ll be watching very carefully to the extent in which consumers react to the rate hike. [Both] in terms of the sentiment effect but also a cash flow effect, if they’re having to pay more money on that high level of debt,” the managing director added.

“Even though the level of mortgage default is relatively low, in the extent that you’ve got rising rates at a time of falling house prices and weak wages growth, that’s the trifecta of bad news and there’d be some risk that [mortgage defaults could increase].”

The economist also believes that a cash rate cut will provide the Australian export industry with a “free kick” amid rising interest rates in the foreign markets.

He said: “[The] Aussie dollar is stuck in the high ’70s, early ’80s, and is having an impact on exporters, so maybe an interest rate cut when the US is hiking rates would allow the currency to fall and give [the Australian economy] a bit of a free kick.”

[Related: Economic indicators pointing to a rate hold] Source Mortgage Business

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