Interest rates are staying put, for now

Interest rates are staying put, for now

Posted on Tuesday, October 07 2014 at 2:25 PM

Property investors and homeowners have heaved a small sigh of relief after the Reserve Bank of Australia (RBA) today announced that, once again, the cash rate will be staying exactly where it is for at least another month.

The rate has been
sitting at a historically low 2.5 per cent since August 2013, having been cut
twice the beginning of 2013. The last time it rose was in November 2010 (by
0.25 per cent). 

RBA governor
Glenn Stevens made the monthly announcement today, explaining that despite
volatility in some financial markets picking up in recent weeks, “overall…
financial conditions remain very accommodative. Long-term interest rates and
risk spreads remain very low. Markets still appear to be attaching a low
probability to any rise in global interest rates or other adverse event over
the period ahead”.

He went on to say
that public spending is scheduled to be subdued in the near future and that,
overall, the RBA still expects growth to be a little below trend for the next
several quarters. He also commented on credit growth, saying that it’s moderate
but has seen a further pick-up in recent months as competition to lend has
increased. On the subject of house prices, he simply made the comment that
dwelling prices have continued to rise over recent months.

There is some
belief that relatively low consumer confidence forced the RBA’s hand.

Mortgage Choice
spokesperson Jessica Darnbrough says: “According to the Westpac Melbourne
Institute of Consumer Sentiment, confidence fell by 4.6 per cent in September.

“This sudden and
disappointing drop in confidence has ultimately forced the RBA to leave the
official cash rate on hold at today’s board meeting.

“While the
Reserve Bank has made it clear in recent weeks that something needs to be done
to cool the property market, it is now unlikely that the board will raise the
cash rate anytime soon as this may further negatively impact consumer

RP Data’s head of research Tim Lawless believes the softer
reading for housing market conditions during September may have gone some way
to easing some of the concerns of the RBA.

Nevertheless, he adds, “the trend in dwelling values remains
strong, with the RP Data CoreLogic index reporting a relatively sedate 0.1 per
cent rise in capital city dwelling values over the month of September but a
much stronger 2.9 per cent increase over the September quarter”.

He goes on to suggest that the trend rate of growth needs to
be closely monitored, particularly across Sydney and Melbourne, where values
have risen so much more than other cities.

“Investor interest in these markets has been significant
compared with other capital cities and compared with historical ratios of owner
occupier loans to investor loans.  
“If investor interest in these markets doesn’t moderate we can expect the RBA,
in conjunction with APRA, to intervene via prudential regulation of the banking
sector to attempt to slow down the level of investment lending activity in the
market. As foreshadowed in remarks from the RBA to a recent Senate Economics
Committee inquiry into affordable housing, such an intervention is likely to
take the form of higher risk weightings (or capital) for investment loans,
although this is unclear at this stage.

“In any event, the goal would be to slow the level of
speculative investment across the housing market, particularly in Sydney and
Melbourne, alleviating the pressure on the RBA to raise interest rates in order
to dampen housing market conditions,” he says.  

Citing recent
data that suggests the Australian economy is performing strongly, Darnbrough
adds: “Now is a great time for those with a mortgage to review their home loan
and make sure they are still in the most suitable product for their needs.

“Similarly, if
you would like to get onto the property ladder, now is a good time to do so.”

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