• Unemployment and underemployment (ie labour underutilisation) at over 14% are way too high.
• This is maintaining downward pressure on wages growth, which is at a record low of 1.9% year-on-year (in terms of the historical record for the Wage Price Index).
• Underlying inflation risks are staying below target for longer, reflecting low wages, the rise in the Australian dollar, and competition.
• There are risks around economic growth, as the contribution to growth from home building is likely to slow this year, and retail sales growth is weak at a time when mining investment is still falling.
• Bank ‘out of cycle’ mortgage rate hikes have delivered a ‘modest’ de facto monetary tightening anyway.
The RBA has to set interest rates for the average of Australia.
Therefore, raising interest rates just to slow the hot Sydney and Melbourne property markets would be complete madness at a time when overall growth is still fragile, underlying inflation is well below target, and property price growth elsewhere is benign or weak.
The banks have recently begun raising rates for property investors, and on interest-only loans by around 0.25% and principal and interest owner-occupier loans by around 0.03%. The stated drivers have been higher funding costs, presumably following the back-up in global bond yields over the last six months, and regulatory pressure to slow lending to investors and higher-risk borrowers.
More moves may lie ahead if global borrowing costs rise further, but they again would be focused on investors and interest-only mortgages. In the absence of RBA rate hikes, these are likely to be small, as only 20–30% of bank funding is sourced globally.
But it’s worth putting out-of-cycle moves in context: The RBA is still in control. Out-of-cycle bank moves have been a regular occurrence since the GFC, and yet this did not stop mortgage rates from falling to record lows in response to RBA rate cuts. If the RBA wants to lower mortgage rates again, it can just cut the cash rate till it gets the mortgage rates it wants.
While our base case is that rates have bottomed and the next move will be up next year, for this year, if the RBA is going to do anything, there is still more risk of a cut than a hike – particularly if underemployment remains high, wages growth remains weak, and the Sydney and Melbourne property markets really come off the boil.
By the second half of 2018, the drag on growth from falling mining investment is likely to have ended. Stronger global growth should have started to help Australian growth, and stronger employment growth should have started to benefit full-time jobs and wages, while the threat around below-target underlying inflation should have subsided.
All of this combined should allow the RBA to start raising interest rates; on current indications, it’s hard to justify RBA rate hikes before then.
- The RBA expects underlying inflation to gradually rise
- Sydney and Melbourne residential property markets are uncomfortably hot
- Financial stability risks will be high if household debt continues to rise
Shane Oliver is AMP Capital’s
head of investment strategy and chief economist
While due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
