As we make the momentous transition from 2014 to 2015, ringing in another new year full of hope and possibilities, suggestions abound as to what the Reserve Bank should do with interest rates from hereon in.
After well over a year of an unprecedented low rate environment, officially sitting at 2.5%, the monetary policymaker has gathered its fair share of both critics and supporters from various factions.
Some say it’s created much-needed economic stimulus by boosting waning consumer confidence, while others staunchly believe the RBA’s ongoing ‘do nothing’ stance is causing more problems for a property sector, already teetering on the brink of serious affordability and ‘bubble’ crises.
So whose side will the Central Bank favour when they resume affecting Australia’s economic fortunes on February 3rd next year?
A little bit lower now
Research analysts with investment bank Credit Suisse, Damien Boey and Hasan Tevfik, are two advocates for change when it comes to the official cash rate.
They suggest that high unemployment, along with weakening consumer confidence and business sentiment, are good reasons for the RBA to lower the cash rate considerably in coming months.
“We believe that the RBA is not done with its easing cycle. We think that the bank needs to cut rates below 2 per cent,” the pair said.
Despite acknowledging the very real conundrum the Central Bank is facing, with serious concerns as to further cuts adding impetus to an already accelerating housing market, Credit Suisse says the cash rate needs to fall slightly below 1.5% to address certain weaknesses in the Aussie economy.
The investment bank claims, according to its forecast modelling, that borrowers should not anticipate another rate rise before late 2015 or early 2016.
“Private sector confidence has declined to below-average levels consistent with weak credit growth,” read a Credit Suisse statement.
“The unemployment rate has risen to a cyclical high of 6.2 per cent and is still increasing, consistent with rising spare capacity and subdued inflationary pressure.
“We believe that the model is telling us about the Australian economy’s struggles to adjust to a post-mining boom in a post-Global Financial Crisis world.”
Adding credence to the Credit Suisse take on interest rates as we head into 2015, Reserve Bank Governor Glenn Stevens made headlines recently by announcing the RBA’s willingness to keep interest rates low for some time to come…as long as the housing market remains in check.
In a speech delivered to the Committee for Economic Development in Melbourne on 18th November, Stevens said the need for stronger growth outside the resources sector justified more “accommodative” monetary policy.
“Inflation is well under control and is likely to remain so over the next couple of years,” he said.
“In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet.”
Acknowledging concerns from analysts regarding ‘too much, too soon’ within certain pockets of the property markets, largely due to investor driven demand, Stevens was quick to add: “But for accommodative monetary policy to support the economy most effectively overall, it’s helpful if pockets of potential over-exuberance don’t get too carried away.”
Answering the big questions
While Stevens is aware of the dangers associated with our fiscal fortunes being too tied up in the housing sector and associated borrowing activities, he assured listeners at the Economic Development ‘do’ that he’s not losing too much sleep over it.
He says while there are signs in the investor housing market that “some people might be starting to get just a little overexcited,” he’s comfortable with the current per annum rise in credit outstanding to households of 6 to 7%.
Stevens notes, “It is not clear whether price increases will continue or abate. Furthermore, it is not to be assumed that investor activity is problematic, per se.
“A proportion of the investor transactions are financing additions to the stock of dwellings, which is helpful. It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.”
Commenting on the hype surrounding a potential team effort from industry regulators APRA and the RBA to address lending standards through regulatory change – particularly around higher risk borrowing practices – Stevens says it’s all about sustainability and is in no way an attempt to “restrict lending via direct controls.”
He adds, “It is not an attempt to restrain construction activity. On the contrary, it is an attempt to stretch out the upswing.”
As for any plans to adjust interest rates purely off the back of investor driven market sentiment fuelling property price growth, Stevens says this is not even a remote consideration right now.
What it means for mortgage owners
For a start, think carefully before you consider locking in a fixed rate just yet. Ask yourself, have the banks been particularly generous with their fixed rate offerings of late because they could smell further cuts in the wind? For now, I would be waiting and watching rather than fixing.
On the upside, it seems that mortgage owners can look forward to ringing in 2015 with a glass of bubbly, celebrating the good fortunes and higher returns afforded by the certainty of lower rates for some time to come. Cheers to that!