Will the RBA raise interest rates in June 2010?

Australian Interest rates

RBA cash rate trend

Source: Reserve Bank of Australia

The RBA has increased the cash rate from a 49-year low of 3% in October 2009 to the current 4.5%, a strategy of six 25 basis point increases over the last 8 months to bring interest rates to “more normal” levels. During this time, there were an estimated 270,000 first home buyers who entered the property market, taking advantage of the lower interest rates and the First Home Buyers Grant which have since been wound back by the government. As a result, property prices across Australia rocketed up by 20% in the year to March 2010, fuelled by the record low interest rates, a strong Australian economy with solid export figures fuelled predominantly by a growing Chinese economy where GDP grew by 8.7% in 2009. This is a strong case for the RBA to try and keep housing prices in check. However, the RBA’s over-riding priority is to keep Australia’s underlying inflation rate in check, that is to have the CPI fluctuating between 2 – 3% in the long run. Moreover, there are now signs the property market is beginning to feel the effects of the 6 rate rises:

  • Auction rates have cooled down, particularly in hot markets in Melbourne and Sydney. Australian Property Monitors indicate Melbourne’s clearance rates were down to 73% last weekend from 82% in the same weekend last year and from 62% to 60% for Sydney.
  • New home loans have been decreasing over the last 6 months to March 2010 to hit a 9-year low.
  • A drastic decrease in first home buyers who have put off buying their first home due to a combination of near unaffordable prices in popular and high growth suburbs across major capital cities, rising interest rates, job security and the end of the FHOG.
  • Home buyer sentiment is now weaker compared to 2009.
  • The Melbourne property market is bracing for a record 1,210 auction listings to enter the market over the next 2 weeks where REIV CEO Enzo Raimondo says is mainly due to the sharp increase in interest rates which are reducing pressure on house prices.

However, I believe the current housing shortage in Australia and strong population growth coupled with strong migration figures will continue to support house prices at current levels although there have been some recent indication the stock of supply is increasing albeit very slowly. Unless there is a clear solution to address the supply shortage and barring any major downturn in the world economy such as the current European debt crisis, there will still be pressure on house prices in the near future. Personally, I am tipping a 95% chance that interest rates will remain on hold at its current level of 4.5% and a mere 5% chance the RBA may actually reduce rates by 25 basis points to 4.25%.

Related post:

Statement by Glenn Stevens, Governor, Reserve Bank of Australia ~ 1 June 2010

Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels.

European policymakers have responded by assembling a large package to provide financing for the relevant countries for a period of time, stabilise bond markets and provide liquidity. They have also committed to action to bring budget deficits down and stabilise debt over time.

The effects of these various factors on the world economy will need to remain under review. At this stage, global growth is still expected to be at about trend pace in 2010. Conditions in Europe overall have been relatively weak, and the foreshadowed budgetary tightening will probably mean that this will continue, but growth is becoming more established in North America. In Asia, growth has continued to be quite strong and may need to moderate in the year ahead.

In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Inflation appears likely to be in the upper half of the target zone over the next year.

Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago. Taking all the available information into account, the Board views this setting of monetary policy as appropriate for the near term.

Source: First Chartered Capital

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